If you are considering breaking into real estate investing, an owner-occupied duplex home is the best place to start. This is particularly true if you are a young person who has not yet established a home for yourself and your family. An owner-occupied rental duplex has so many advantages for rental property investors, it is impossible to overstate them.
Any owner-occupied multi-family home has some advantages. What makes an owner-occupied duplex so attractive is that it is the most affordable type of owner-occupied multi-family property since it is just the two units. This makes buying an owner-occupied duplex more affordable for new investors. Here is Mashvisor’s guide to investing in an owner-occupied duplex rental property.
Why Buy an Owner-Occupied Duplex
Let’s jump ahead a bit and summarize the main advantages of an owner-occupied duplex rental property. First, it qualifies for a special type of low-downpayment loan that banks are willing to give a future investor. These loans are unique in that they are structured as personal loans and not investment property loans. The terms are almost too good to pass up.
Next, let’s face it. You have to live someplace. Why not live next door to the very first investment property you purchase? You will have no commute when you need to visit for any reason. And the reasons are many. Working on improvements to create equity. Conducting repairs. Interviewing tenants. Showing the property to possible renters. The list is endless and you will find that it is a luxury to live close to your rental property throughout your investment career.
Finding an Owner-Occupied Duplex Property
Finding duplexes for sale is always more difficult than finding a single unit to purchase. Municipalities in many areas restrict duplex construction with zoning laws. In some areas, duplex homes are turned into a pair of condos. That negates the possibility that you can use the duplex as an owner-occupied rental property – even if you can somehow buy both sides. But don’t despair. Mashvisor has the tools you need to find owner-occupied duplex homes. Start your search here.
Owner-Occupied Duplex Financing
Once you locate a duplex owner-occupied target property, you will need to secure financing. The steps to buying a duplex are similar to those for any small multi-unit family building. The difference is that you will be establishing your primary residence in one of the units.
You can apply for a low-downpayment Federal Housing Administration (FHA) loan. FHA is part of the U.S. Department of Housing and Urban Development. These agencies were created in 1934, so FHA loans are not new. They are also the opposite of risky. They are backed by the federal government.
FHA loans have three main advantages to a young investor. First, they offer the lowest down payment of all convention loan types. Second, they have easy credit qualifying. Third, they even have low closing costs. Last, the interest rate is lower than the rate for an investment property mortgage. What’s not to like? For some, it is the requirement that the owner occupies the property for a number of years. Two, at a minimum, are required to meet the terms of the loan.
House Hacking an Owner-Occupied Duplex
You may have heard of house hacking. This generally refers to buying a duplex with “no money down.” While it is technically possible to get an owner-occupied duplex with none of your own money down, it simply means you have borrowed the down payment. Usually at a very high rate of interest and for a short term. The chances that a bank will lend you 100% of the value of a property as a first-time buyer are extremely low.
The options for “no down payment” purchases are limited. How to buy a duplex with no money down? You can borrow the down payment on a rental property from family or friends. Borrow from a hard money lender (who typically do not work with first-time investors). Or try to leverage other high-interest credit to obtain the required up-front cash for an FHA loan. Bankers know this trick and they may not approve the loan if you don’t really have any cash on hand. One glance at your savings history will reveal how you got the down payment. Lenders know that most new homes need immediate repairs. They will want to see that you can do those and still pay your mortgage.
Rent Control and Renting Out Owner-Occupied Duplex Homes
Then there are rent control laws and local ordinances. Did you know that owner-occupied duplex homes often are excluded from the draconian rent control laws many urban areas have? When renting, you may be exempt from having to allow some government-subsidized renters. You will also likely be exempt from rent increase caps depending on your local laws. Though it is always best to ensure compliance with all fair housing laws. Your duplex is not just a wise investment for your own term in the property. It will also be an attractive investment when you opt to sell on.
Hidden Advantages of Owner-Occupied Duplex Investments
So far, we have focused closely on obtaining an owner-occupied duplex. Once you secure a loan and buy a duplex, you will quickly discover there are other benefits. One of the most meaningful is related to owner-occupied rental laws. In many areas, rent control laws dictate how an investor can manage their business. Almost every part of the business is dictated by the laws. California has a statewide rent control law. However, owner-occupied duplex units are excluded from many of the rules.
A second advantage is the mortgage interest deduction and depreciation exemption. Your tax attorney can help you to set up a limited liability company (LLC). Once established, you will benefit in many ways. One that is notable is the mortgage interest deduction from your earnings. A second is the depreciation exemption. In the short-term, you may find that the earnings from the rent on your duplex are effectively “tax-free” in the short term.
Investing in an owner-occupied duplex is a proven and sound way to break into the real estate rental business. Mashvisor has the tools you need to find and evaluate owner-occupied duplex investment opportunities. Click here to get started right now.