I bought a duplex to save money on rent
This article is part of the “reader stories” feature at Get Rich Slowly. Some stories contain general advice; others are examples of how a GRS reader achieved financial success — or failure. These stories feature folks from all levels of financial maturity and with all sorts of incomes.
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.
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.
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There are 36 comments to "I bought a duplex to save money on rent".
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.
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.
“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.
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 the security deposit.” (This one said while standing next to her HUGE bodybuilder boyfriend, after having driven up in a $70,000 SUV.)
If, after the background check goes through, you still have a bad feeling, don’t rent to them. Better to have the place vacant for one month, than to have to go through the legal system to evict.
Don’t be so quick to rule out rental properties, Beth. It can be a great source of income, even if you have to pay someone to fix things around the house, someone else is still buying you a house.
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.
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!
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.
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.
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.
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!
That is awesome Karl! Congrats on your financial independence.
>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 property and renting it out.
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.
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/
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!
@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 the equation.
After that, you should hopefully bring in a few dollars of free cash flow. Why? In my experience, you will spend all of the Vacancy and Maintenance monies. Not if, but when. So you MUST set those monies aside each and every month for each and every house.
Where do you really make money?
You essentially don’t UNTIL the tenants have paid off the mortgage for you. Then you recapture the mortgage and that becomes your spendable cash flow.
There are nuances to the above, but that’s the nuts and bolts of it. You might get appreciation above the rate of inflation, but don’t count on that. You might get real a real good cash flowing property that nets you a few dollars in the interim. This is highly dependent on the market where you intend to buy. Not all markets are conducive to owning rental real estate.
Rental real estate is a LONG-TERM investment. Every month the tenants are paying for your house giving you an increasingly larger percentage of ownership. But the real payoff comes when the bank lets you start keeping the principle and interest payments.
I have 6 rental houses. Three of them are paid off. Another will be paid off the first of the year, and the remaining two within 2.5 years after that due to snowballing the mortgages. My personal home is paid off also. I suggest you start there.
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 who rent are often people who can’t yet afford to buy, or won’t be staying long enough to justify purchasing their own home. So they will be okay with renting smaller places (also smaller check for the landlord), and they would prefer a place with good public transit.
Whereas if you are looking to buy a permanent home, you might want a bigger yard, bigger house, quieter neighbourhood, possibly more remote (no public transit but who cares since if you can afford a house, you can afford a car).
So I think it’s best if you have a clear idea of what you’re buying a place for – rental or home. Because good homes don’t necessarily make good rentals, and vice versa.
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.
I sure most people make lots of money.. but for me, the headaches and people (with their issues) were not worth it.
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 rent it because it has been contaminated with chemicals….this happens!
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.
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?
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 THE TIME!! Be careful. If your gut says no, by all means don’t rent to them.
Thank you for sharing this story, and great point about there being zero cost to start looking!
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?
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.
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.
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.
Yup, you’re paying rent to yourself so you have both a landlord you can trust *and* a guaranteed tenant.
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. I have made friends with all of my renters. It is great.
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.
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.
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 those jobs for the pros. Also emergencies you may have to leave to the pros. You can save money elsewhere, like ripping up carpet, painting, cleaning, etc…
A little advice for those that are on the fence whether to continue renting or buy a rental property.
Find a lawyer. Create a thorough lease agreement, borderline intimidating to your applicants. Cater it to your rentals.
For your application. Be thorough and make it intimidating.
The lazy applicants, most likely the ones you don’t want renting from you, will come for the showing and wont take an application. The responsible ones will and get back to you. Also, consider an application fee.
Don’t be an absentee landlord. Assure your tenants you can be available for them.
In times of emergencies, act! Be present and reassure them the emergency will be resolved.
It is how you react/respond that can determine whether your tenants stay or go.
Hope this helps with anyone’s decisions!
Are their consequences for not moving into a owner occupancy FHA loan right away?
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 many benefits of duplex ownership either as an owner/landlord or in a partnership!
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!