Grant Trevithick - Buying a duplex

Buying a small multi-unit rental property like a duplex is a great way to quickly build a real estate portfolio with healthy cash flow. That’s because for each property you buy, you’re getting two sets of tenants and two streams of rental income.While investing in small multifamily rental property definitely has its rewards, there are also certain risks as well if you’re not careful.

What is a duplex?

A duplex is a residential property with two units and two separate entrances. Units are usually next to each other with a shared wall or built on top of each other with one unit on each floor. Oftentimes there’s a shared front and back yard, and driveway for off-street parking.Duplexes are the perfect choice for investing in multifamily property because even though they’re small, they are also built for two families to live in.

Advantages of buying a duplex

Many real estate investors think of buying a duplex as getting two houses for the price of one. The units are connected, but there’s two of everything, including the monthly rent checks.Some buyers purchase a duplex to live in one unit and rent the other one out, while others view a duplex as a two-unit rental property.Here eight big advantages to buying a duplex, even if it’s your first rental property investment:

1. Affordability. Depending on the market, the cost of buying a duplex can be more affordable than buying two single-family houses.
2. Cash flow. Duplexes double your cash flow, similar to owning a tiny apartment building.
3. Rentability. Some tenants – especially singles or retirees – prefer to rent a smaller duplex unit that still feels like home without having to take care of a big house on a large lot.
4. Vacancy risk. Risk of 100% vacancy in a duplex is very low, because tenants very rarely vacate at the same time.
5. Growing a portfolio. Getting two rental units each time you purchase a duplex is a great way to increase the number of “doors” and cash flow in your real estate portfolio.
6. Financing. Multiple financing options including conventional, FHA, and VA loans, while 203(k) loans let you incorporate any needed repairs into the mortgage.
7. Maintenance. Maintaining and repairing a duplex is easier because the units are smaller and located right next to one another.
8. Property management. Property management is most cost-effective and efficient since there’s no wasted travel time between tenants.

Drawbacks to buying a duplex

While there are plenty of advantages to owning a duplex, there are also some potential drawbacks as well:

1. No location diversification. Because the units are all in the same location, a duplex doesn’t help you to geographically diversify where your rentals are located, which increases your risk if the market cycles downward.
2. Double the trouble. Potential for double the amount of problems and repairs if you don’t conduct the proper due diligence before you buy and manage tenant conflicts before they get out of hand.
3. Higher insurance costs. Homeowners and landlord insurance may be more expensive to purchase, so be sure to talk to your agent to understand the true cost of ownership and the effect of insurance premiums on your net operating income.
4. Downside of house hacking. House hacking – or living in one unit of the duplex while renting the other unit out – might sound appealing, but you’ll be right next door to a tenant who may think you’re on call 24/7 for the smallest of problems.