If you’re considering investing in real estate, a duplex could be a good choice. You can usually take out a mortgage for an investment property more easily if you plan to live in one of the units than if you were buying a house to rent out entirely. In particular, investors who are just getting started might find financing a duplex to be the easiest way to begin.
Before you decide to invest in a duplex, find out what loan options are available, when it’s beneficial, and how to use rental income to qualify for a loan.
What is a duplex?
A duplex is a property that’s divided into two separate living spaces. It’s basically like having two homes in one property. Each living space has its own entry, and some even come with separate garages and outdoor spaces.
A duplex is different from a twin home, which has two homes and two lots, and are considered two different properties. With a duplex, one mortgage covers both units.
What is a multi-family home?
A multi-family home is a property that has different units that families can live in. The term is typically used to describe a property with two to four units. Duplexes are a type of multi-family home.
The case for living in a duplex
When you buy a duplex, you can become an owner-occupant, living on one side of the property and renting out the other. This comes with certain advantages:
- Easier to finance: Living in a duplex might prove to be a simpler investment for first-time real estate investors. That’s because it’s usually easier to get financing for owner-occupied properties than nonowner-occupied investment properties.
- The other unit helps pay your mortgage: Depending on the rental market in your location, the rent paid by your tenants in the second unit may cover all or most of your mortgage payment.
- Only one shared wall: If you like some degree of privacy, you only have to share one wall when you get a side-by-side duplex.
- Chance to start building rental income: Your duplex can be a way to start building income. Once the second unit is providing cash flow, you could potentially move out of the duplex and get a tenant to replace you. With the extra money, you can look into getting another property.
Counterpoint:
There are some drawbacks to living in a duplex as well, including the potential that you might not like your neighbors and the fact that you’re responsible for repairs and maintenance throughout the property, not just in your unit.
The case for investing in a duplex
Rather than living in the duplex, you could get a multi-family mortgage and rent out both sides of the duplex. Some of the advantages of financing a duplex this way include:
- More rental income: By renting out both sides of the duplex, you’re likely to get more rental income, providing you with more cash flow.
- Avoid living next to your tenants: If you don’t want to be bothered by tenants, renting out both units allows you to avoid hassles. Your tenants are less likely to come to you since you won’t be living on-site. They can contact you during normal business hours when there’s an issue.
Counterpoint:
It can be hard to get financing for a duplex — or any investment property — when you don't live in one of the units. You may need a bigger down payment or the lender may require other documentation since the loan would be considered an investment loan.
How to finance a duplex or multi-family home
Financing a duplex you plan to live in is generally easier than one you don’t live in. If you don’t plan to live in the unit, it’s usually considered an investment property, so you’ll need to come up with a bigger down payment and meet other lender requirements.
For owner-occupied properties
In general, the process of financing an owner-occupied duplex is fairly similar to getting a mortgage for a single-family home.
Depending on the type of mortgage you get, you’ll need to meet the following down payment requirements for an owner-occupied duplex:
Conventional loan
At a glance: Conventional loans are originated by a private lender and without government backing. Depending on the lender, you could put as little as 15% down for a duplex, although you might need to pay for private mortgage insurance (PMI).
You can use a conventional loan as a multi-family mortgage. These loans are subject to certain limits. Conforming loan limits are set each year by county. They’re the same in most areas, except those with high costs. In most places, the loan limits are:
- Single-family: $766,550
- Duplex: $981,500
- Triplex: $1,186,350
- Quadplex: $1,474,400
If you live in a high-cost area, you can check with Fannie Mae or Freddie Mac to see what the limit in your area is.
Expert tip:
“Conventional mortgage requirements are more stringent than government-backed loan requirements. For instance, you’ll need a higher credit score to take out a conventional loan.” — Reina Marszalek, Senior Editor, Mortgages
You’ll also need to pay PMI if your down payment is less than 20%, though it can usually be removed after you build up enough equity.
FHA loan
At a glance: FHA loans are insured by the government. In general, the credit requirements are a little easier to meet and you can make a down payment as small as 3.5%. All FHA loans, though, require you to pay mortgage insurance premiums.
With an FHA loan, you’ll be required to meet loan limits, but you might not have the same stringent credit requirements that you’d see with a conventional loan.
FHA loans come with a relatively low 3.5% down payment. However, you’ll pay mortgage insurance premiums for the life of the loan if your down payment is less than 10%. If you put more than 10% down, your mortgage insurance will be canceled after 11 years.
VA loan
At a glance: VA loans are backed by the U.S. Department of Veterans Affairs and only available to those who have served in the military or their surviving spouses. These loans don’t have the same credit requirements as conventional or FHA loans and there’s no down payment requirement.
For those who qualify, a VA loan can be a good choice when financing a duplex. You don’t have to put anything down, and there isn’t a requirement to pay mortgage insurance.
Pro tip:
Remember the VA does impose an upfront funding fee — you’ll need to budget for between 1.25% to 3.3% of the loan, depending on your down payment and whether you’re using a VA loan for the first time.
For investment properties
If you don’t live in your duplex, the situation changes. You’ll need a higher down payment — for conventional loans, the minimum is 25%. In addition, the lender might want to see local rental rates, occupancy statistics and other documents that indicate the property will be profitable.
No government-backed mortgages
Government-backed programs like FHA loans and VA loans require that you live in the property as a primary residence. If you aren’t planning to live in the duplex, you won’t be able to access these programs.
Higher down payment requirements
Lenders require larger down payments — usually 15% minimum — when you’re not using a property as your primary residence. This is, in part, because investment properties pose a greater risk to lenders — if you fall into financial straits, you’re more likely to stop making payments on your rental property than your own home.
Check out: Are Condos a Good Investment? Figuring Out the Pros and Cons
Using rental income to qualify for a duplex loan
It’s possible to use projected rental income when applying for a multi-family mortgage, even as a first-time homebuyer.
The appraiser will include a special form called a Small Residential Income Property Appraisal Report that takes into account:
- What each unit is likely to bring in for rent
- The condition of the property
- The value of comparable rental properties in your area
- The neighborhood’s characteristics
Once that’s done, Fannie Mae lets you “count” 75% of the market rent when qualifying for a loan.
So, let’s say that your monthly mortgage payment for a duplex is $1,500, and you plan to live on one side while renting out the other side for $1,200, the market rent.
You can use $900 — 75% of the market rent — to reduce the amount of debt considered when calculating your debt-to-income (DTI) ratio.
Now, instead of a $1,500 debt payment impacting your DTI, only $600 is considered part of your DTI, which can help keep you below the 50% DTI limit.
