Looking for an affordable way to become a first-time homeowner and earn rental income? One strategy is to buy a duplex as a first home.
As long as you’ll live in one of the units for at least the first year, you can rent the other one out. Best of all, you can purchase them both with a single, low down payment mortgage.
What's in this Article?
Absolutely. As long as you meet the borrower criteria, you can get approved to buy a duplex as your first home.
A duplex is a residential building that is similar to a single-family home but is divided into two separate dwellings. The units sometimes share a wall, or they can be divided into an upstairs and downstairs unit.
The individual units in most duplexes are typically 1,000 to 2,000 square feet, says John Maxim, a real estate investor in Salt Lake City.
“The common duplex is a condo-like, multifamily home, split in two, with identical units on either side,” Maxim says.
Why buy a duplex as your first home?
A duplex can be a great way to get started with real estate investing. If you plan to live in one of the units for at least 12 months, you can buy a duplex with a low down payment home loan.
Several common loan types allow you to buy multifamily properties with up to four units:
- Conventional loans: 15% down for a duplex
- 25% down for 3-4 units
- 5% down on 2-4 units with a Freddie Mac Home Possible loan, for borrowers that meet income requirements
- FHA loans: 3.5% down with a credit score of 580 or higher
- VA loans: 0% down if you have full VA entitlement available
USDA loans cannot be used to purchase multifamily properties.
After you’ve lived in one of the units for 12 months, you can move out to a new property and rent both units for income.
“The most lucrative duplexes are close to a medium or large city. Within the past year, the price of all real estate has gone up, including for duplexes, which can be a great investment – especially if you live in one of the units and rent out the other,” Maxim says.
The great thing about owning a property is that you can leverage it to purchase additional income-producing properties. In addition to the rental income you earn, you’ll also gain equity as you pay down the mortgage and as the homes’ values increase.
You can then sell those properties for a profit or continue renting them out for an ongoing income stream. As your equity in the properties grows, you can also take out a cash-out refinance or home equity loan and use that money to purchase additional properties.
Another option is to use a home equity line of credit (HELOC) to renovate the homes. You may then be able to sell them for a higher price or rent them out at a higher rate once you’ve made value-adding upgrades.
Using future rental income to qualify
In most cases, you can use future rental income on the property you’re buying to help you qualify for the loan.
Conventional loans approved by Fannie Mae or Freddie Mac standards allow you to use 75% of future rental income on any units you won’t occupy. For instance, you could use estimated rents for one unit of the duplex.
You must supply proof of fair market rent on Fannie Mae form 1025 or Freddie Mac form 72, or current leases.
FHA allows you to use future rental income to qualify if you supply either:
- An appraisal showing fair market rent on Fannie Mae form 1025 or Freddie Mac form 72
- Leases, if available from current or future tenants.
The lender may use 75% of estimated rent per the appraisal or actual rents, whichever is lower; it can also use the amount reported on the operating income statement if one was completed.
It’s a bit tougher to use future rental income on the property you’re buying on a VA loan. First, you must:
- Have six months of cash reserves for the entire property payment
- Verify prior experience as a landlord or have other background in property maintenance and rental
If all this checks out, you can use 75% of the appraiser’s opinion of rental value or actual leases. You can only use rental income to offset the mortgage payment, not to add to your regular income.
Keep in mind that, for any program, not all lenders will allow you to use future rent. Check with your lender if you need this income to qualify.
There are pluses and minuses to buying and living in a duplex. Consider the following:
|You can live in one unit and rent out the other, using the rental income to help pay your mortgage||You’ll have to manage tenants and find someone to rent the other unit|
|You can buy a duplex with a low down payment loan||You’ll live right beside your tenant, which means you’ll have less privacy|
|After living in the duplex for 12 months, you can move to another property and rent out both units for rental income||You will be responsible for maintenance and repairs on both units, rather than just the one|
There are a few key advantages to buying a duplex.
First, as mentioned, you can live in one of the units and lease out the other unit, creating a steady income stream that will help pay off your mortgage loan.
You can also purchase a duplex as an investment property in which you rent out both units and live elsewhere, but you’ll get better loan terms if you live in it.
Here’s another perk:
“Duplexes are usually less expensive by the unit than single-family homes,” says Erik Wright, owner of NewHorizon Home Buyers in Chattanooga, Tenn. “For instance, the most expensive duplexes often cost slightly over $500,000, whereas the average single-family home may cost around $300,000. This means that duplex purchasers can get more value for their dollar.”
Additionally, you may qualify for a low down payment loan on a duplex, assuming you are living in one of the units.
“That is a great way to enter the market and start your real estate portfolio, especially if you can quickly rent out one of the units,” says Ryan Ross, a Realtor with Weichert Realtors in Morris County, N.J. “Depending on your mortgage rate and the rent rate, your income could surpass your expenses, which means you could be living for free while making money.”
Buying a duplex has advantages outside of earning rental income as well. If you’re considering multigenerational living, a duplex is a way for multiple families to live in close proximity while also having privacy and their own space.
But a duplex isn’t for everyone. Perhaps the biggest disadvantage to owning and living in a duplex is that you will have to assume the role of landlord and manage both units.
“You’ll need to maintain far more property than you would with a regular single-family home. This can be very challenging, especially as a first-time homeowner,” says Marina Vaamonde, owner and founder of Houston-headquartered HouseCashin. “Some people are simply not cut out to be a landlord, so you need to know yourself well and what you are capable of before getting into something like this.”
You’ll have to advertise the unit for lease, screen and carefully select a rental candidate, collect the monthly rent, respond promptly when your tenant has issues, and keep the entire building well maintained.
If none of that sounds like fun, look into hiring a property management company. For about 8-12% of the monthly rent, a property manager will handle all the less desirable things that come with landlording.
But even with that solution, you’ll experience a lack of privacy living in a duplex.
“You have neighbors right next to you or below you and, depending on who they are, that can be a real problem. Tenants can be needy, loud, and late on payments, making for an uncomfortable situation,” Ross adds.
Another issue is that there are often fewer duplexes available than single-family homes.
“This will depend on your chosen area, but in general, there is low inventory across the country for all types of homes, including multifamily properties such as duplexes,” notes Ross.
Can you buy a duplex as a first home? FAQs
Yes, you can purchase a duplex and live in one of the units. You can rent out the second unit for rental income if you choose.
In some cases, yes. Conventional and FHA loans allow you to use expected rent from any unit you won’t occupy. For VA loans, you must prove prior landlord experience and you can only use expected rent to offset the future mortgage payment.
It’s not necessarily more difficult to get a loan for a duplex than a single-family home. If you plan to live in one of the units and rent out the other, you may be able to buy with a no or low down payment loan, such as a 15% down conventional loan (5% for borrowers that meet income requirements through Freddie Mac Home Possible), 3.5% down FHA loan, or 0% down VA loan.
If you plan to purchase a duplex as an investment property and you will not live in one of the units, you can apply for an investment loan. However, investment loans require higher down payments and credit scores, and they also have higher interest rates than loans for a primary residence.
Buying a duplex can be a savvy move for first-time homebuyers who want to offset their housing costs via rental income earned by leasing out one of the units. But you have to live in one of the units as your primary residence for at least 12 months if you want to buy the duplex with a low down payment purchase loan. You will also have to serve as a landlord and manage and maintain the other unit, which can be challenging.
Buying a duplex can be a smart strategy that allows you to receive a steady income stream that will lower your homeownership costs. It can also help you build equity and create new financial opportunities for yourself. But you have to be prepared for the responsibilities that come with being a landlord and managing a rental property.