What To Consider Before Buying a Duplex as a First Home

Owning a duplex can provide you with a residence and extra income

Couple standing in the hallway of house with a stairway going up
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As a first home, a duplex can provide the dwelling you need and an opportunity for extra income. Since a duplex has two residential units under one roof, you have the option to live in one and rent out the other. However, a duplex might not be the best option for some first-time homebuyers.

Choosing a duplex as a first-time homebuyer comes with advantages and disadvantages. It gives you the opportunity to earn more income, but you’ll face the hassles of being a landlord. Are you up for the challenge?

Key Takeaways

  • Renting out one unit of a duplex can help you pay your mortgage, but it can also add more expenses.
  • Renting out a duplex unit offers federal tax benefits.
  • Occupying a duplex unit while renting out the other unit requires two types of insurance.
  • You can purchase a duplex with a conventional or government-backed loan.

Pros and Cons of Buying a Duplex

Pros
  • Extra income

  • Rental income can offset your mortgage

  • Rent increases can lead to a profit

  • Tax benefits

Cons
  • Landlord hassles

  • May not qualify for first-time homebuyer programs

  • Additional expenses

  • Interruptions in rental income

  • Must report rental income

  • Shared property

Pros Explained

  • Extra income. Living in one side of a duplex and renting the other side to tenants can create an additional income stream. Besides putting extra cash in your pocket, renting one unit of a duplex can improve your debt-to-income ratio, a measure that lenders use to determine your ability to repay a loan.
  • Rental income can offset your mortgage. In the beginning, a rent payment might not cover your entire mortgage payment, but using even a partial payment garnered from the rental income can help pay off your loan.
  • Rent increases can lead to a profit. Over time, you can increase rent, which can lead to a profit, covering more of or even your entire mortgage payment.
  • Tax benefits. The Internal Revenue Service (IRS) allows landlords to deduct certain expenses in their federal tax returns. Deductions can include advertising, depreciation, insurance, mortgage interest, property taxes, operating expenses, and repairs.

In some locations, rent control laws limit the amount a landlord can increase a tenant’s rent.

Cons Explained

  • Landlord hassles. Landlords must respond to their tenants’ needs, and renting to a tenant who lives next door can create additional hassles. For instance, if your tenant has a repair request, they might immediately knock on your door rather than call during business hours.
  • May not qualify for first-time homebuyer programs. Some first-time homebuyer programs do not offer benefits for multifamily dwellings. Be sure to check if the program you’ll be using has any unit restrictions.
  • Additional expenses. As a landlord, you’ll have to pay the maintenance and repair expenses for your home and your tenant’s.
  • Interruptions in rental income. When a tenant moves out, it could take time to find a new one, leading to a loss in rental income. If you rely on rental income to cover your mortgage, tenancy gaps can cause financial hardship.
  • Must report rental income. When filing your federal tax return, the IRS requires you to include your rental income.
  • Shared property. A duplex doesn’t provide the same amount of privacy and serenity as most detached single-family residences. Most duplexes share a floor, have at least one common wall and may share a backyard.

Buying a Single-Family Home vs. a Duplex

There aren’t many differences between purchasing a single-family home vs. a duplex—until you get into the insurance aspect. 

  Single-Family Home Duplex
Minimum Credit Score 620 for conventional loans; 500 for FHA loans. The VA does not require a minimum credit score, but most lenders do. 620 for conventional loans; 500 for FHA loans. The VA does not require a minimum credit score, but most lenders do.
Minimum Down Payment 3% to 15% for conventional loans; 3.5% for FHA loans; 0% for VA loans 3% to 15% for conventional loans; 3.5% for FHA loans; 0% for VA loans
Insurance Standard homeowners insurance policy Homeowners and rental property policies

Minimum Credit Score

Whether you’re buying a single-family home or a duplex, you’ll face the same minimum credit score requirements. But requirements vary by the type of loan you choose. You can apply for an FHA loan with a credit score as low as 500, depending on the amount of your down payment, while conventional and VA loans require a credit score of at least 620.

Minimum Down Payment

The Federal Housing Administration (FHA) backs loans for homes with one to four units and requires a down payment of at least 3.5% of the purchase price. When taking out a conventional loan for a single-family or multi-dwelling home (typically up to four units), you’ll need to make a 3% to 15% down payment. Veteran Affairs (VA) loans do not require a down payment for single-family homes or duplexes as long as the sale price doesn’t exceed the home’s appraised value.

Insurance

A single homeowners policy can cover a duplex if the owner occupies both units. But if you buy a duplex, occupy one unit and rent the other, you’ll need two types of coverage—a home insurance policy and a landlord policy.

The homeowners policy will provide dwelling coverage for both units, plus personal property coverage for your personal items. Landlord insurance includes dwelling coverage and property coverage that protects items used to service the rental unit, like lawn and cleaning equipment. A landlord policy also includes liability protection and may also cover lost rental income if the rental unit sustains damage due to a covered loss.

As a condition of the lease, many landlords require tenants to carry renters insurance.

Preparing To Be a Duplex Landlord

Buying a duplex with the intention of renting one side requires advanced preparation that most first-time homebuyers don’t face. First, research landlord-tenant laws in your area to learn about your responsibilities and rent stabilization restrictions, if any. Also, conduct a market study to find out how much rent other landlords charge.

You will also need to draft a lease agreement and application documents, which should include a:

  • Credit check form 
  • Background check form
  • Income verification form
  • Rental history form
  • References form

An inspection form will also be helpful in documenting the condition of the rental unit. Complete the form during a walk-through with your new tenant before they move in and when they move out. Along with the written report of wear and tear, also take time- and date-stamped photos of the unit to keep on file.

Should You Buy a Duplex as Your First Home?

Buying your first home is a big decision, which leads to major financial responsibility. Buying a duplex with the intent to rent out one of the units adds the responsibility of running a business to the mix. You must have the time to respond to a tenant’s needs and the funds to maintain the property.

Before buying a duplex, find out if you qualify for any first-time homebuyer assistance programs, offered by federal, state, and local governments. Local Public Housing Authorities offer homeownership vouchers for low-income first-time homebuyers, and the federal government operates the Indian Home Loan Guarantee Program, which provides mortgages for Alaska Natives, American Indians, and Tribally Designated Housing Entities.

The FHA provides loans and insures mortgages for first-time homebuyers, and the VA offers home loans to service members and veterans. In addition, the U.S. Department of Agriculture operates loan programs for rural homebuyers.

Frequently Asked Questions (FAQs)

What’s the difference between a townhouse and a duplex?

A duplex is individually owned but has two residential units, typically side by side, with separate entrances. A townhouse is a single residential unit, individually owned, which typically sits side by side with identical or similar units. Both types of dwellings often have common foundations and walls between units.

How much does a duplex cost?

Many factors determine real estate prices, including:

  • The desirability of the neighborhood and its available services
  • Comparable home prices within a neighborhood or community
  • The duplex’s age, condition, and construction
  • The size of the unit and its lot
  • The state of the housing market

Home costs can vary widely by location depending on surrounding property value. In addition, a low supply of homes in a market typically drives up prices, while an oversupply of homes can cause prices to plummet.

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Article Sources

  1. IRS. “Tips on Rental Real Estate Income, Deductions and Recordkeeping.”

  2. National Apartment Association. “Rent Regulation: Policy Issue,” 

  3. Fannie Mae. “Selling Guide.” 

  4. FDIC. “203(b) Mortgage Insurance Program,” Page 4.

  5. Consumer Financial Protection Bureau. “FHA Loans.” 

  6. U.S. Department of Housing and Urban Development. “FHA Single-Family Housing Policy Handbook,” Page 7.

  7. Consumer Financial Protection Bureau. “How to Decide How Much to Spend on Your Down Payment.” 

  8. U.S. Department of Veterans Affairs. “Purchase Loan.”

  9. Insurance Information Institute. “Coverage for Renting Out Your Home.”

  10. American Family Insurance. “Basic Landlord Forms You Need.”