Should Your First House be a Duplex?

DuplexWhen most people think about buying a house, they picture a single family home, maybe with a garage, a fence, a dog . . .  Most people don’t think: maybe I should buy a duplex and share my property with someone else.  But there can be some real benefits to buying a duplex as your first home.

A duplex can offer some financial advantages when compared to a single family house, especially if you don’t need tons of living space.  Although most people think a duplex in one neighborhood costs about twice what a single family house does, this is rarely true.  Here in Austin, a similarly-located duplex generally costs about 1.25 times the price of a house in the same neighborhood.  To pick an easy number for an example, if a single family house is selling for $200k, a duplex in that area will sell for about $250k.

A Duplex Gives a Lower Net Monthly Payment

In February 2012, two properties near St. Edward’s University in South Austin were for sale.  The home, at 613 Long Bow, was a 1,042 square foot home with 3 bedrooms and 1 bath on .179 acres, offered for $224,900 and had “some” updates.  The duplex, at 2715 St. Edward’s Circle, was on .2 acres, and offered two units, each with 2 bedrooms and 1 bath units, with a total of 1,575 square feet, offered for $229,900.  Each “updated” unit was rented for $950 per month.

If you plan to live in the duplex, you are eligible for FHA financing, which many first-time buyers use because it requires only a 3.5% down payment.  This example assumes an FHA loan with 3.5% down, a 1% origination fee, and a 30-year mortgage at 5% interest (although we are currently seeing interest rates as low as 4%) with no closing costs paid by the seller.

Home

Duplex

Purchase Price

$224,900.00

$229,900.00

Down Payment

$7,871.50

$8,046.50

Mortgage Amount

$217,028.50

$221,853.50

Closing Costs

$4,000.00

$4,100.00

Monthly Principal and Interest Payment

$1,165.06

$1,190.95

Monthly Private Mortgage Insurance Payment*

$90.43

$92.44

Monthly Homeowners Insurance

$75.00

$75.00

Monthly Property Tax

$375.00

$380.00

Monthly Payment

$1,705.49

$1,738.39

Less Rent from Tenant

0

$950.00

Net Monthly Out of Pocket

$1,705.49

$788.39

*If you are able to put 20% down, you will not need to pay PMI and some banks and credit unions have financing that does not require PMI, even with down payment of less than 20%.

The bottom line?  Your net monthly out of pocket on a duplex is much lower, even assuming that you have to pay for repairs on a duplex that you would not have to pay for on a house (as home owners, we can tell you, there are always repairs).  You may also be entitled to tax benefits for certain expenses associated with repairs, maintenance, and upgrades to the rented side of your duplex (check with a tax professional).

Buying a Duplex can Lead to Faster Payoff and/or More Equity

After several years of living in your duplex and renting the other side, you will have almost the same amount of equity than if you purchased the single family home, even though your net monthly out of pocket was less.  After 10 years in the single family home, you will owe just over $176,000.  Assuming that property values have not changed (although in Austin, we usually see appreciation), your equity in will be approximately $41,000.  After 10 years in the duplex, you will owe approximately $180,400 and also have approximately $40,000 in equity, but you will have paid approximately $114,000 less out of pocket because your tenant has been paying about half of your mortgage payment! 

Instead of using the monthly savings another way, you might use it to pay your mortgage off faster.  Assuming you add about half the rent – $450 per month – to your mortgage payment, your mortgage on the duplex would be paid off in 17 years. Even paying an extra $300 per month would pay your mortgage off in 20 years!  At that point, you would own a $230,000 duplex free and clear.

So, I’ve Paid off the Mortgage — I Don’t Have Any Payments Anymore, Right?

Once you pay off your property, you live mortgage free, but not payment free.  Based on the original assumptions, after the house is paid off, you’re still paying $450 per month for taxes and insurance.  Once the duplex is paid off you still pay taxes and insurance of $455/month, but with your tenant paying you $950 per month, your monthly profit is $495/month!

That’s Great!  Why Doesn’t Everyone Do It?

Buying a duplex is not for everyone.  You have to manage your property, including finding tenants, making repairs, etc.  And, instead of living in a 3 bedroom, 1,042 square foot home, you’re living in 750 square feet.  On the other hand, instead of having a roommate to share expenses, your “roommate” is in the other duplex (and, in the one in this example, your units are separated by a carport and have no shared walls, much less shared bathrooms).

Moxie has sold owner-occupied duplexes to people who have found it to be a great investment.  As one client says, “Honestly, a duplex was not on our radar when we began looking. But the one we bought did not look like a ‘typical’ duplex. It also allowed us a chance to start doing whatever remodeling we wanted in small chunks rather than have to think of a whole house all at once while income was coming in from the other side. The rental market in Austin is red hot; ours was on the market 3 weeks and we had a waiting list of tenants. For us it has been perfect!  The additional income got us into a great location and neighborhood, the size is just right, and we can be very picky on who we want to share the other side.”

One of the real pluses of Austin’s duplexes is their diversity.  Not all duplexes are mirror images; you may be able to find a duplex that has a 3 bedroom, 2 bath unit on one side and a 2 or 1 bedroom, 1 bath unit on the other.  You might start out single and living in the smaller unit.  Then, if you meet someone awesome, you can move to the larger side and rent out the smaller one.  If you’re ready to add to your family, you could sell the duplex and roll the equity into a larger single family home (or keep it as an investment property and rent both units out).  If you think a duplex might be right for you, contact us and we’ll be happy to run the numbers, discuss your options, and work with you to find the perfect place!