I bought a duplex to save money on rent

This story is from Karl Boericke. He is the author of The Frugal Berry, money-saving tips of all kinds for home, office, and small business.

In 1990, I was honorably discharged from the Navy and quickly found a job in an electronics manufacturing company as a technician in their test department. While renting an apartment at the time, I wondered how I would ever be able to afford to buy a house with my meager salary. I had heard that buying a duplex was an inexpensive way to live and build equity in a home.

After looking at a few mobile homes and quickly realizing the long-term downside to such an “investment,” it became clear that buying a duplex was my best realistic ticket to home ownership. I lucked out in finding a great real estate agent who gave me some sage advice. Even though I could buy a duplex with a VA loan with almost NO cash up-front, she advised me to use an FHA first-time buyer mortgage. This would cost me some money at purchase, but it would give me the possibility of using my VA loan in the future for my “next duplex.” This thought stimulated my imagination, and seemed like an impossibility at the moment, but I followed her advice and kept this long-term idea in storage for another time.

Before I bought my first duplex, I was spending $525 per month to rent a studio apartment that consisted of a kitchen, bathroom with stand-up shower, and an all-purpose room that held my bed, dresser, couch, and a small TV placed on top of my file cabinet. After buying, I was now living in luxury. I had two bedrooms, a living room, a spacious kitchen with laundry hookup, and a full bathroom. I was now renting out a one-bedroom apartment below me for $425 per month, and my mortgage payment was $653 per month, which included real estate taxes, mortgage interest and insurance. This meant that my effective cost of housing per month went from $525 while renting to $228 for more space and home ownership.

Twenty-five months later, I bought my second duplex. This time I used my VA loan, and had very few out-of-pocket costs at closing. I moved into this new duplex to satisfy the loan requirements, and lived there for five years before getting married and buying a single home.

At this point my duplexes were paying for themselves, generating some additional income, and building equity that didn't suffer even in the most recent housing tumble. Anyone who has watched the movie “Pacific Heights” knows the possible downside to being a landlord. Luckily I did not watch this movie until I was a year into my second duplex.

I had a huge learning curve as a landlord, but never had to evict anyone through the legal system. Twice the tenant and I came to a “mutual understanding,” and they were out by the end of the month.

Maintenance came easy for me, but even if I had to pay contractors to take care of any issues, I still would have been saving money like crazy. The dollar figures have changed over the past 20 years or so and mortgage requirements are changing, but the investment opportunities are just the same, or even better in the current housing market.

If you are renting an apartment, living paycheck to paycheck, I highly recommend that you consider buying a duplex. It doesn't cost anything to look, and if nothing else you will be more educated on your possible options for the future.

More about...Home & Garden, Investing

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Ramona
Ramona
7 years ago

Yes I remember that movie Pacific Heights. I think it scared me from becoming a landlord, maybe for life! I really like the way you presented this, very straightforward, a simple solution to a big problem. Congratulations, and thanks for sharing your story.

My Financial Independence Journey
My Financial Independence Journey
7 years ago

Buying a duplex is an idea that I am very partial too. But each neighborhood has it’s own character. Some neighborhoods have lots of duplexes (or their tri- and quad- plex cousins) and some have very few. If there were more multifamily properties around where I live, I would consider getting one.

Although I would have to hire an on-call handyman because there no way that I would be able to fix anything.

Beth
Beth
7 years ago

“Twice the tenant and I came to a “mutual understanding,” and they were out by the end of the month.”

This was probably due to your military training. 🙂

But seriously, this was a good story. I have no desire to be a landlord, but I’m just curious as to how you vet a potential tenant.

Mrs. 1500
Mrs. 1500
7 years ago
Reply to  Beth

Mr. 1500 and I have been landlords twice, and are looking into purchasing rental properties in the future. How do you vet a potential renter? Background checks. If they have massive debt they don’t pay and low credit scores they don’t seem to care about, they are probably not going to be a great tenant. We ran ads and got some of the craziest people answering them. “I want to run a daycare out of the home.” Um, no. “I have 5 large dogs.” Well, good luck finding a place to rent. “I can’t pay the last month rent or… Read more »

phoenix1920
phoenix1920
7 years ago
Reply to  Beth

During a closing, I talked with a real estate attorney about this very issue and he said if you struggle getting money out of a tenant and think you need to turn to a legal action, instead, tell the tenant that the agreement is not working, you will pay them $x to break the contract, but only if they move out without damage within y days. He said that tactic rarely fails because people who are trouble are always looking for how to get money for free and will bite.

Nick Z
Nick Z
5 years ago
Reply to  phoenix1920

I have never paid a tenant to leave but my cousin’s husband did and it worked! I forget exactly how much money he dished out but the troubled tenant left right away without any further issues. Good advice!

Jane Savers @ The Money Puzzle
Jane Savers @ The Money Puzzle
7 years ago

My oldest son graduates university soon and I have been encouraging him to purchase a duplex in the city where he will be employed. He will probably need a roomate in the beginning to help build a cash reserve.

Nick Z
Nick Z
5 years ago

Jane, I think that is great advice! I wish I would have bought a duplex right out of college. With both a roommate and a tenant in the second unit your son should be able to pay his mortgage, taxes, utilities, and still have a little bit of cash left over for beer. Plus 30 years from now the place will be completely paid off! A paid off cash flowing duplex and a healthy 401k sounds like a great retirement plan. More people should start making moves like that when they are young.

Curtis@PayOffMyRentals
7 years ago

I’m done buying rental real estate for the forseeable future (at least until I pay off my current rental real estate).

Having said that, however, I would seriously consider multi-family dwellings next. Either a duplex, triplex or quadplex. I think it’s a great idea to get into your first home especially if you are thinking you’d like to be a rental real-estate investor.

You also get the lower non-investor mortgage rate if you will be living in one of the dwellings for at least a year.

Karl B
Karl B
7 years ago

It has worked great for me. I have recently sold my properties and am now living with no mortgage on my primary residence. It’s a great feeling!

Nick Z
Nick Z
5 years ago
Reply to  Karl B

That is awesome Karl! Congrats on your financial independence.

skeptic
skeptic
7 years ago

>but the investment opportunities are just the same, or even better in the current housing market. Are you kidding? Now vs. the early 90s for real estate? I am interested in this theme and in your story but I think this statement is very much up for debate, if not totally contradicted by facts. The number of properties available with positive cashflow after maintenance is much, much lower than it was then, and the available margins are lower. I’m not saying it’s necessarily a bad idea to do now, but it’s a different world and less hospitable to buying a… Read more »

Karl B
Karl B
7 years ago
Reply to  skeptic

There are always those who say that this is a terrible time to . I received LOTS of criticism in the early 90s over what I paid for my first duplex. I was told that it was WAY too much and that I would NEVER make my money back. Time has proven them all wrong.

There will always be those (including the negative thoughts in your head) that will hold you back from forward progress. All the truly great minds throughout history have learned to block them out.

Mrs PoP @ Planting Our Pennies
Mrs PoP @ Planting Our Pennies
7 years ago

When we were looking for our first home, we put bids on a triplex and a duplex but were outbid and ended up finding a single family home that we loved even more. But a year later we found a duplex that was perfect for us and we were able to grab it for $50K. (Our RE market was absolutely slammed in the RE crash and made headlines as one of the worst in the country.) Here’s the story of how we found it if you’re interested: http://www.plantingourpennies.com/2012/09/10/how-we-bought-a-50k-duplex-part-1/

Jacob@CashCowCouple
7 years ago

Good thought provoking article, but I have mixed feelings. For every one of these “go be a landlord now” articles, someone else is posting the reasons why it’s impossible to make any money as a landlord.

I don’t know, but I’m moving soon and need to figure it out!

Curtis@PayOffMyRentals
7 years ago

@Jacob I’ve been a Landlord since 2004. Here’s the skinny: You should only buy cash-flowing properties. I will go so far as to say that means you are still receiving money AFTER deducting for PITI (payment, insurance, taxes & interest), AFTER a vacancy allowance (I use 8% of the monthly gross rent), and AFTER maintenance allowance (I use 10% of the monthly gross rent). I personally include 12% (rental management) in my expenses because I don’t want to manage them. You may decide to manage your own in which case you can choose to leave the management fee out of… Read more »

Rya
Rya
7 years ago

There are two ways of thinking about buying real estate: A) a place to live, in which case it is a liability since it won’t be putting money in your pocket B) a place to rent, in which case it is an asset, because it will be earning you money The characteristics of a good rental are not the same as the characteristics of a good home. For example, small properties are great rentals because htey are suitable for students or young couples with no kids; but not suitable for a home of a 4-member family. I think that people… Read more »

Ann
Ann
7 years ago

We bought a four unit fixer upper and converted it into our family home + one three bedroom apt. I teach at a college, and we rent to good students I know. Being on site helps with a lot of the management issues. It’s definitely paid off–but Im ready to be done living there (we dint have kids when we bought it, and our needs as a family of five with two older elementary kids are different than as DINKs.

bobj
bobj
7 years ago

I sure most people make lots of money.. but for me, the headaches and people (with their issues) were not worth it.

Ray
Ray
7 years ago

I also am a landlord and I can tell you from first hand experience tenants can do terrible damage. My last tenant liked to smash doors, poke holes in walls and pay a month late. Most laws protect the tenant not the owner. It was very stressful; if you do decide to rent visit the the website landlord.com it will open our eyes… And my god screen your potential tenants like your life depends on it. It may well! Visualize this ..you tenant has a meth lab in your apartment the cops bust the doors down and now you can’t… Read more »

ren
ren
7 years ago

My wife and I purchased a duplex almost 7 years ago at the height of the housing bubble. While we’re under water in it, we were able to live in one unit and pay off almost all of our debt (minus the mortgage).
Screening your prospects is crucial. We’ve been pretty fortunate because of it.

Alex C
Alex C
7 years ago

Good article. I am currently renting and have thought about buying a house, but never considered a duplex.

What are some things I should consider when buying a duplex? Are there certain duplexes that are better than others?

How can I get started?

Karl B
Karl B
7 years ago
Reply to  Alex C

Alex, All I can say is talk to a Real Estate agent in your area. There are too many variables to give you any information specific to your area. What ever you do though, SCREEN your potential tenants. Charge them $50 cash for a credit check. I have been amazed by how many people will pay $50 for a credit check thinking you won’t run it. They all claim “my credit is great”. Then when I see their scores come back I just laugh. I don’t know what possesses people to throw away $50 like that, but it happens ALL… Read more »

Tony@WeOnlyDoThisOnce
7 years ago

Thank you for sharing this story, and great point about there being zero cost to start looking!

Al
Al
7 years ago

I find it hard to believe that you can pay $500 for rent and $600 for a mortgage payment. I spend $1300 a month for mortgage and now I am paying $1000 a month for rent. I lived in California central valley for mortgage and washington state for rent.

Where do you people live?

Karl B
Karl B
7 years ago
Reply to  Al

Al,

Keep in mind this was back in the early 1990’s. The numbers have changed now, but the concept is still the same. What I bought for $97k as my first duplex I sold 16 years later for $185k with the tenants paying my mortgage. That same property today would sell for around $230k. Mortgage payments and rental income increase accordingly.

Andrea
Andrea
7 years ago
Reply to  Al

I live in Kansas and am about to move. We looked for a rental, and for the size we need for our family’s needs (4 bedrooms) a rental would run us around $1800+ per month. Instead, we’re buying a house where the monthly mortgage (plus insurance and taxes) will run us about $1000 per month. So yes, I can see where there can be a big difference in rental costs vs. mortgage payments.

Kati
Kati
7 years ago

People are always going to need a place to live which makes real estate a great investment as long as you do your due diligence and don’t expect to make a fortune overnight. It’s a long term investment rather than a short term one. Once paid off it can become an extra income stream for the future or retirement.

@pfinMario
@pfinMario
7 years ago

Yup, you’re paying rent to yourself so you have both a landlord you can trust *and* a guaranteed tenant.

Steven Cooper
Steven Cooper
6 years ago

My plan when I first got married was to buy a duplex too but I looked around and found a better deal with a 4-plex. We bought it and with my wife and I living here and renting out the other 3 units we are breaking even. I haven’t paid mortgage or rent fro 3 years now and the value of my 4-plex has gone up. I now have over $50,000 in equity. This 4-plex has been awesome and one great part is that by living here I can keep better track of what is going on in my 4-plex.… Read more »

Anne
Anne
6 years ago

May I ask if you got landlord’s insurance (just in case the renter’s damaged their part of the duplex by accident)? If so, how much was the cost of this insurance?

I will be inheriting a property from my family and am trying to get a basic (rough) idea of what it will cost me to keep the property.

Thank you!

A.

Steve
Steve
6 years ago
Reply to  Anne

If you live in one side and rent the other out, it becomes your primary residence and can be insured as a home. Should you decide not to live in the property, you will have to purchase a Rental/Income property insurance. That is definitely something you will want. You will want to insure the house and all of the belongings that are not your tenants (water heaters, furnace, etc…)

Also if you plan on living somewhere else, and you only have a a few units, ask you insurance provider about “Umbrella” policies.

Steve
Steve
6 years ago

My wife and I bought a 2300 Sqrft duplex back in 2010 and have lived in one side of the rental for the past 4 years now. We are about to close on our own home, but will still keep the duplex. I am a handy person and for the most part make my own repairs; however, you have to know when to tell yourself, “Can I make a repair within a timely manner and to not impact your tenant’s quality of life?” or if you have limited knowledge and want to avoid risk, for instance plumbing or electrical, save… Read more »

Ethan
Ethan
5 years ago

Are their consequences for not moving into a owner occupancy FHA loan right away?

Dede Nelson
Dede Nelson
5 years ago

We have owned a duplex on a North Carolina beach for over 12 years in a partnership that began after a conversation at the kids’ school bus stop. Both couples had a passion for beach vacation property but couldn’t really swing it on their own. When this unit with 3 bedrooms and 2 baths on each side came on the market, they realized that the could share expenses and have the option to swap weekends to have plenty of space for extended family and friends! http://255eastfirst.com We need to sell for health reasons, but we’re still educating people about the… Read more »

Kara Brodsky
Kara Brodsky
4 years ago

Thanks so much for sharing your story! I am eager to buy my first duplex! I am so excited to be my own landlord! Thanks for the tips!

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