Pitfalls in Duplex as a First House?

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Gilberto de Piento
Posts: 1942
Joined: Tue Nov 12, 2013 10:23 pm

Pitfalls in Duplex as a First House?

Post by Gilberto de Piento »

I currently rent but would like to own a home/invest in real estate. I've been thinking about getting a duplex as a first house. I need to run more examples but it looks like I could live in one half and have someone else pay the mortgage if I purchase wisely. Once I've lived there long enough to save another downpayment I'll buy another place and rent out both sides of the duplex.

One problem I've noticed is that there is a paradox when looking at listings. If the duplex isn't already rented it appears to be a bad investment but if it is is already rented then I won't be able to move in until the existing lease is up.

Any thoughts on this plan in general? Has anyone done this? Anything to watch out for?

OmFlux
Posts: 15
Joined: Thu Oct 17, 2013 2:06 pm

Re: Pitfalls in Duplex as a First House?

Post by OmFlux »

It is not always a bad investment if it is not rented out.

My wife and I did this back in 2001. We bought a duplex and lived in the bottom, renting out the top. It was actually vacant at the time and the owner lived out of the country. We bought the house for $66k in a market that was supporting $85-95k.

We were quite happy there, till we had three kids and decided to move to a single family home. In the interim, we purchased two more duplexes. One had one tenant in it, the other had two tenants in it.

A smart owner, if they know they are in the process of selling, will put the tenants on a Month to Month lease. They know that most buyers will want to vet their own tenants. And when there is a For Sale sign on the lawn, it's no secret to the tenants what is going on. When I sold one of the duplexes in 2013, I put both tenants on a month to month lease, and they left on their own accord prior to closing. You would want to ask the Sellers if they have the tenants on a lease, and if so, is it month to month, or year lease. You may also stipulate, as a buyer, that the house be vacant when you close on the home. If the owner can't meet that condition due to existing rental agreements, then it's your choice to move on.

As far as pitfalls go, I can't think of many. We were fairly lucky, I guess. Good tenants for the most part. However, when you are living there, you have no where to hide if the tenant has a problem that needs to be fixed. That can be good or bad depending on how you look at it. I thought it was good, instead of playing phone tag, I could get the issues looked at and fixed faster. Now, when I have problems or repairs at a property, I have to play phone tag and drive 45 minutes to check it out, then coordinate repair guys and make sure somebody is home...that kinda stinks. I still own two duplexes and this is painful to manage with a fulltime job, kids and family, etc.

On the slightly negative side, as far as tax write-offs go, for repairs on the jointly used parts of the property, i.e., The Roof, Common entrance doors, or Common Stairwells, I can only deduct half of the repair from my taxes if I live in one of the units; versus can deduct all of it if I don't. I also cannot deduct any repairs that are done on the unit I am living in, unless I lie about it, which I don't.

I will say I also got slightly burned, due to my ignorance, when I sold a property. I bought the property for $65k in 2003. Due to the neighborhood downturn, I sold for 60k in 2013. So I figured I sold at a loss, good for my taxes. But all the repairs that I did over the years, like new roof, furnaces, etc, got depreciated over a set period of years (based on Federal Tax Tables). Those depreciations are great for your year to year taxes, but not for when you sell. Due to the depreciation, the house was "worth" $42k when I sold it. And so I had to pay taxes on the $18k "gain" I realized, for tax year 2013. Sucked. And I still don't totally understand it, but that's what my illustrious account told me.

ETA: On the really good side, our mortgage was $591 including Taxes at the time, and we were getting $500 a month in rent for upstairs. So $91 a month to live in a three bedroom home (each "unit" of the duplex was three bedrooms one bath, so six bedrooms, two baths total) is not too shabby; and the tenant is building up my equity.

Hope this helps...

Riggerjack
Posts: 3182
Joined: Thu Jul 14, 2011 3:09 am

Re: Pitfalls in Duplex as a First House?

Post by Riggerjack »

The success in the above story is in the "We bought the house for $66k in a market that was supporting $85-95k" line. Buying at that kind of discount makes it hard to lose.
Duplexes are popular, and as such, demand a premium in good markets. Here in suburban Puget Sound, I've seen duplexes offered at the same price as 2 SFH in the same area. They don't usually sell, but I've seen some go for what seemed like a ridiculous price.

Duplexes here rent for more than the same sized apt, less than the same sized house.

One solid advantage to an owner occupied duplex is you are right there, on site every day. That is an additional filter for tenants. A tenant who is uncomfortable living next to their landlord is probably not the tenant you want. Mind you, the opposite is not necessarily true. A drama intense tenant may prefer a caged audience...

startbyserving
Posts: 72
Joined: Fri Feb 06, 2015 2:45 pm

Re: Pitfalls in Duplex as a First House?

Post by startbyserving »

I've always heard of people getting started in real estate via this method. My father in law started out in a duplex. He now has a handful of duplexes among his other businesses. This is no accident though. He's one of the hardest workers I know.
Unfortunately Sig Other has an aversion to multi-unit housing, so starting in a duplex wasn't a clear option for us.

Just do the Math, and think things through.

How difficult will it be to find a good tenant for the other side?
Will you be able to afford the entire mortgage if there is no tenant?
How will it effect you if you end up with a problem tenant next door?

With a traditional mortgage you will get an owner occupied based rate. You keep this rate even if you move out later! (Must live there at least a year.)

sea
Posts: 44
Joined: Thu Oct 29, 2015 10:28 pm

Re: Pitfalls in Duplex as a First House?

Post by sea »

I am curious about this too. I currently rent as well and am starting to research different options. In my area, there are currently a good assortment of duplexes where a 30-year mortgage is about same/or less of what I'm currently paying for rent and the other unit is renting for more than the mortgage. I'm also wondering what other downsides there might be besides the hassles that may come with being a landlord and home ownership in general. It is tempting to consider paying off the mortgage quickly and have the option to keep it as an rental or sell it once I FI.

OldPro
Posts: 298
Joined: Tue Mar 31, 2015 12:37 pm

Re: Pitfalls in Duplex as a First House?

Post by OldPro »

There is no one right answer here as all the different points given above show. You 'pays your money and takes your chances', just like any other rental income scenario. You have all the same pros/cons of being a landlord.

One thing is sure though and that is that leveraging your money is always a good thing. Having other people's money working for you is better than just having your own money working for you. I see a mortgage and rental income as leveraging your own money. I just happen to prefer commercial/industrial property over residential property from a 'landlord' viewpoint.

Buying a duplex as a first home is not a good or bad idea, but it is an idea. How it works out will be up to you to determine. Looking for people to validate or reassure you that it will work is just a waste of time. You jump in and see if you can swim.

sea
Posts: 44
Joined: Thu Oct 29, 2015 10:28 pm

Re: Pitfalls in Duplex as a First House?

Post by sea »

@OldPro I don't think your post was directed at me, but I think there is value in hearing about other people's experiences especially lessons learned. One would be a fool to make investment decisions solely on advice or validation solicited online (although I'm sure many do). But I like to gather a lot of information and synthesize it and factor in my unique circumstances and make a decision from there. Personally, I'm not going to jump into to doing something like purchasing a duplex until I feel comfortable in my understanding of the ins and outs and the potential risks and pitfalls.

SimpleLife
Posts: 771
Joined: Wed Aug 21, 2013 8:23 pm

Re: Pitfalls in Duplex as a First House?

Post by SimpleLife »

I recently looked at a duplex, and while talking to my agent, I could LOUDLY hear the next door neighbor. It wasn't that they were blaring music or anything, it was opening drawers, cabinets. It sounded like normal noise. But the house was so poorly insulated that you could LOUDLY hear EVERYTHING the neighbor did. No thanks, I avoided condos for that very reason and bought a house.

OldPro
Posts: 298
Joined: Tue Mar 31, 2015 12:37 pm

Re: Pitfalls in Duplex as a First House?

Post by OldPro »

I am all in favour of research sea but I find that a lot of people confuse anecdotal evidence with research. Hearing 6 pro opinions vs. 6 con opinions by individuals is not really research. On any given day all it gets you is more of one than the other perhaps but it really proves nothing and is of no real value.

Research is about statistical data and hard facts. I'm always surprised at how many people who would call themselves 'computer savvy', are unable to do any real searching for useful data. There is a degree of skill involved in doing a good online search on a subject but I don't consider it requires a high degree of skill, more just common sense.

A forum such as this one where you can get anecdotal evidence of say how safe brand X cars are is of little use. A search for statistical data of independent crash tests on the other hand is worth searching for. Instead of asking us about 'the pitfalls in Duplex as a First House?', the OP could have asked, 'where can I find real factual data on the pros/cons of a duplex?' They are two totally different questions.

The first leads to anecdotal 'evidence' while the second leads to real research if you get good responses. Nowadays anyone can write a blog with their opinion on any subject. If you do some searching on 'landlord renting' you will find lots of blogs or news articles purporting to tell you the ins and outs. If they are one person's opinion with no indication of empirical evidence to back up those opinions, one is of no more value than another.

On the other hand, sites like the following on rental insurance costs does provide actual empirical research and so is far more useful. http://www.canstar.com.au/home-insuranc ... -landlord/ If you look at the tables there, you can see how it would give a potential landlord real information on where it would be best to buy and what kind of property to buy in regards to a house vs. a 'unit' for example.

There is a difference between, "In 2015 our research team has compared 41 policies and 2,663 quotes across individual houses and strata dwellings." and your, my or anyone else's individual experience. The 2,663 is a statistically valid sampling, our opinions are not.

So researching is a good thing but it is not to be confused with simply gathering opinions which as you may have heard, are like assholes, everyone's got one.

freedomseeker
Posts: 27
Joined: Sun Nov 15, 2015 7:29 pm

Re: Pitfalls in Duplex as a First House?

Post by freedomseeker »

*watching thread closely* Right now I have a great living arrangement, but this idea has been on the radar for a couple of years to try to get a kick start if I move into owning a home (or to buy/rent both sides if I continue my cheap rent situation), but more time to learn/grow pile first.

There are a few that look reputable (and a few that don't) but does anyone have any favourite book recommendations for real estate investors in Canada?

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