If you’re looking for a townhouse or duplex for sale and you’d like to compare a duplex vs. a townhouse, you should know that there’s a certain kind of scenario we have to consider – owner-occupied duplexes vs. townhouses. Doing this comparison while considering a duplex that’s being utilized purely as investment property wouldn’t make sense in this kind of context.
If I could go back in time to when I bought my townhome in 2008, I would have switched things up and worked with my wife to purchase a duplex instead. We couldn’t afford much back then, but I’d be in a strong financial position now if we had made that decision years ago.
Did you know you can buy a duplex as a first-time home buyer using the same financing as you would for a single family home?
You buy the duplex, owner-occupy it, and rent out the other unit.
It’s called an owner-occupied duplex.
Being an owner-occupied duplex owner is entirely different than owning a townhome because an owner-occupied duplex can become an income producing investment.
Think of these two scenarios:
A: You Buy a Townhome at $220,000
B: You Buy a Duplex at $260,000
When you buy, you are going to put down 3.5% which means you’ll come up with either $7,700 or $9,100 for the mortgage down payment. Obviously this is an incomplete example because we will not be considering closing costs, which will play a part in just about any transaction.
But we want to keep this simple.
Townhome (Option A): $925.10/Month
Duplex (Option B): $1,198/Month. The duplex you buy has a unit that will rent for about $1,000 a month.
Subtract the rent, now you’re looking at a scenario like this.
Townhome (Option A): $925.10/Month
Duplex (Option B): $198/Month
What could you do with that extra $1,000/month? Pay off debt? Pay off your mortgage early? Invest it in the stock market?
Take a look at what might happen if you were to put that extra $1,000 a month towards the mortgage….paying it off in 12 years.
After 12 years, it would be kicking out CASH.
That’s just one option you’d have with that equity and extra 1k a month.
Why People Buy Townhouses
Most people buy a condo or townhouse because:
They’re Less Expensive
They Don’t Need a Big House Yet
They Prefer a Homeowners’ Association Fee Over Hassle
There’s more hassle with a duplex, but also an opportunity to make massive profits.
Buying a duplex and starting a small real estate portfolio is like building a business. If you make the sacrifice of dealing with a little more hassle, you’ll find yourself with an income producing operation shortly.
But isn’t buying a duplex way harder than buying a townhouse?
If you’ve been pre-approved for single family, you’ll likely be approved for more with a duplex. Just ask your lender about the programs they offer for considering potential rental income as yours when you qualify.
Duplex Financing vs. Townhouse Financing
Single-Family Financing: Your Income + Credit = Approval Amount
Multi-Family Financing: Your Income + Credit + A Portion of Projected Rental Income = Approval Amount
Most lenders will allow you to borrow against projected rental income and increase your borrowing limit. We don’t want you to overspend, but you might be able to find a duplex that offers a great potential for producing cash flow from rental income to help with your mortgage payment.
A duplex could be like a perfect business to invest in.
Owner Occupants Can Use FHA Financing
Because you can use first-time homebuyer and FHA financing to purchase a duplex, you can easily build up a portfolio of properties over time.
Owner-Occupied vs. Investor Down Payment Requirements
If you went to the bank to buy an investment property they’d consider credit and then ask you to put 20% down as a down payment if your income was high enough.
However, this is not the case for first-time homebuyers who want to use FHA financing. In many cases, they can get by with a down payment as low as 3.5%.
$280,000 Duplex For An Investor: $56,000 down payment.
$280,000 Duplex For An Owner Occupier: 3.5% is a $9,800 down payment.
If you buy using an FHA or a VA loan, the main requirement is that you live in the duplex you buy for at least a year. After one year, you can move out, find a renter, and buy another duplex.
When you borrow for your second, third, and fourth owner-occupied duplex, the lender will only “count” about 70% of your rental income against your current liability. If you bring in $2,000 a month in rent, only 70% of that would “offset” your first property as a liability. That means borrowing for your second property will require a little bit more income.
After a year, you can buy another duplex. You can do this every year. You can build an investment portfolio.
Positive Cash Flow
Now, you’ll want to build some “cash on cash” return for each of these.
Imagine you put in $15,000 into each property for closing costs and down payments. Each property cash flows about $180/month positive after all the extra costs and taxes. That would create a 14.4% “cash on cash” return in this example.
That’s very high, but it’s common to see 8-12% cash on cash return on a duplex.
Cash on cash return and cash flow is then amplified by the tax benefits real estate investment offers. You can write off the expenses associated with the mortgage, mortgage interests, and then the depreciation amount of the home.
Read more on our site about the tax benefits of real estate.
The bottom line:
Buying a duplex vs. a townhouse can really transform your financial picture. Whether it’s just drastically lowering your cost of living or if it’s building a real estate portfolio to live off of, they are amazing tools.
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