Duplex Vs. Single Family Home Pros & Cons

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Frequently, I get clients that are trying to convince someone that their idea of buying a duplex versus buying a single family home is not lunacy.

Parents often go into protection mode when their kids talk about buying a duplex instead of buying a single family home. They fear that their kids will run into a terrible tenant that trashes the unit and doesn’t pay rent.

Does this happen? Sure, on occasion. However, I have found that the people that run into issues with tenants often have one fatal flaw – they don’t screen the tenants.

Avoiding Tenant Nightmare Stories in One Simple Step

I learned what to do through experience, and also asking property owners where they went wrong with tenants.

The common denominator for the tragic tenant situation almost always comes down to what the process is to allow them to rent from you. When I first started in my rental property ownership, I didn’t advertise that I did criminal background checks and credit checks. I couldn’t understand why prospective tenants would show up, love the place, take the background/credit paperwork and then disappear.

I finally had a situation where a tenant asked me for the background check and then called about an hour later. He explained to me that his criminal background would reveal a fight he was involved in and that he had a first-degree assault on his record (he attacked someone with a weapon).

Needless to say, I couldn’t have someone like that renting from me. I quickly learned to state that anyone with a felony or multiple misdemeanors on their record would be denied.

Legally, you want to have something in writing that shows what you need to qualify once you do a credit check. An income of 3 to 4 times the cost of rent and a minimum 620 middle credit score were two of my requirements.

A 620 credit score is the minimum that cell phone companies will take for someone to pay their cell phone bill after each month. I figure if you can’t qualify for this, you probably are going to struggle paying rent.

I know I have went off on a tangent, and there is a lot more to credit checks, but I want to show a snippet of what you should do to assure you don’t get a problem tenant.

Now on to the fun part, the financial comparison!

Duplex Vs. Single-Family: The Financial Outlook for Each

Dave Ramsey, one of America’s leading financial experts, started his home ownership journey with a duplex.

In reading the Millionaire Next Door, a book about the traits of millionaires in America, you will find that there is one main misunderstanding about millionaires.

Most Americans believe that Millionaires have become wealthy because they have large incomes. The truth was that Thomas J. Stanley found that most people became millionaires because they were able to keep their expenses low – not that they had large incomes.

This simple principle is the best argument for owner occupying a duplex rather than buying a single family home.

A two bedroom apartment rents in a range of $1035 to $1340 in St. Paul and Minneapolis. I have found that a number of duplexes allow the owner to cut this cost in half and often do even better than that when the rent one half of a duplex and live in the other half.

If you purchase a single-family home, you will often exceed this rental range so the duplex is even more financially attractive.

A couple of other pluses to buying a duplex is the tax advantage. You will likely be able to depreciate a portion of the building when you are living there, thus reducing your tax liability.

I have a number of clients that have bought a duplex as their first property and then used that property as a stepping stone to make a single-family home more affordable by using the rental income they are receiving to pay toward that home.

Here’s some simple math on the duplex vs single-family:

Purchase Price: $250k apiece

Monthly payment: $1483

Rental income from 2 bedroom unit in duplex: Minimum $1000

Additional expenses with duplex: paying water, sewer and garbage for tenant, and additional repair money along with vacancy. Total $250 per month.

Total net income: $750 monthly

Your monthly cost of the mortgage: $733

Monthly savings: $750 x 12 = $9,000 per year

Five Year Plan of living in duplex = $45,000 difference.

Please keep in mind, I am being conservative on the rental income and also not figuring in the depreciation tax credit that would make it more lucrative.

What could you do with an additonal $45k in the next five years? Payoff student loans? Travel? Just flat out live better?

Let’s get real here, you are going to have an issue with a tenant on the way, but think about how much crap you have to go through at a job to earn $9000. In thirteen years of rental property ownership, with three properties, I only had to do one eviction.

As long as you do the necessary steps to get the right tenants you will likely avoid the headaches that people are telling you about.