Should You Buy a Duplex, Rent Out One Unit, and Live in the Other?

Investing in real estate can be a smart move, but that doesn’t mean this wealth-building strategy is attainable for everyone. You usually need at least 20% to put down on an investment property and saving that much money can be a tough task for almost anyone – especially in this real estate market.

But, what if you could buy an investment property that brings in cash every month and live there yourself? Believe it or not, this strategy — buying a multi-family unit and using it as your primary residence — is one many new homeowners and investors have used for decades to get their foot in the door.

There are numerous benefits that come with buying a duplex (or any multi-unit property) and living in one of the units, but there are drawbacks, too. Before you decide to buy a multi-unit property like a duplex or a triple-decker, experts say you should explore both the pros and the cons.

The Benefits of Buying a Duplex

If you’re eager to become a homeowner but also want to invest in real estate for the long haul, buying a duplex to live in can help you kill two birds with one stone. Not only will you secure a roof over your own head, but you’ll have at least one other unit you can rent out for profit. Depending on your goals, you could use the rental income to either a) reduce your own cost of living or b) snowball into more real estate investments down the line. You could even do both.

One reason buying a duplex is such an appealing idea is that there’s a lower barrier to entry than if you were buying a free-standing rental property. We already mentioned how you typically need at least 20% to put down on a single-family investment property, but the rules are a lot different if you’re buying a property to live in yourself.

With a home loan from the Federal Housing Administration (FHA), for example, you may be able to buy a duplex to live in with just 3.5% down. FHA loans also come with easier credit requirements and low closing costs, which can make them an even better deal.

In addition to being able to bypass the usual down payment rules with certain loans, there are other benefits that come with buying a duplex to live in. Some of these include:

You can use your rental income to begin pursuing financial freedom. Jason Reed, a Minnesota real estate investor who also runs The Duplex Doctors, says buying a duplex is a great way to set yourself up for financial success. Why? Because you can use the rental income you collect to free up more cash for yourself. “By collecting rental income from the unit opposite or above yours, you have the ability to potentially nullify your mortgage payment and live at a very low cost – thus helping to build financial momentum,” says Reed.
You may be able to afford a nicer home for yourself. Another benefit of buying a duplex is the fact that you can usually count a portion of your future rental income in addition to your own income to qualify for a mortgage. This increases your borrowing potential, says Reed. As a result, you may be able to afford a duplex that is in better shape or in a better area.
You can reap some tax benefits. Being a landlord is a business, which means you can usually write off certain expenses like repairs to the rental unit. But when you live on site, you can also typically deduct a portion of common area maintenance that impacts both the rental unit and yours, like landscaping or snow removal.
You may wind up with a better tenant this way. Buying a duplex you intend to live in could lead to better tenants than you might get if you purchased a single-family rental property. After all, renters who might cause problems or be prone to paying late may not want to live next door to their landlord, right?

At the end of the day, buying a duplex you plan to live in offers a lot of benefits. It’s also important to note that duplex living doesn’t have to be forever, and that you can use this strategy to get started as a real estate investor without saving up huge sums of cash.

Eric Bowlin from Ideal REI is the perfect example of someone who used a duplex to get started in real estate investing when he may not have been able to otherwise. Bowlin says that when he was working on his Ph.D. in New England, they purchased a multi-unit property to live in with the goal of getting their living expenses covered.

However, the income from the property changed the course of their lives, he says, and just a few years later he had dropped out of his Ph.D. program to invest in real estate full-time.

These days, Bowlin is living off of rental income and investing in real estate in lieu of another career. Ultimately, he says buying a duplex or multi-family unit is a great way to transition into investing until you can move into a single-family home. And, you never know, you may even get hooked on the process like he did.

The Drawbacks of Buying a Duplex

While investing in real estate has definite advantages, there are drawbacks as well — particularly when you’re buying a property you’ll actually live in. Some of the biggest downsides of living in your own investment property include:

You may have trouble setting boundaries. Bowlin says that living in your own investment property alongside tenants means the work never ends. “Tenants will think they can ask you to check something out at 9 p.m. at night, even if they’d never ask that of you if you lived elsewhere,” he said.
Things can get ugly fast if you need your tenant to move. Bowlin says that, when you need a tenant to leave or you have to evict them, living next to them can make the process a lot more uncomfortable. Imagine serving your tenant an eviction notice but also having to see them every day.
Bad tenants can make your life a nightmare. It’s one thing to have a bad tenant from afar, but it’s another thing to share walls with one. Reed says that duplex owners have to be extremely careful in their tenant screening process because some tenants don’t treat a property as well as they should, or don’t pay their rent on time. Remember that this person isn’t just your tenant; they will also be your neighbor — for better of for worse.
Being a landlord isn’t for the feint of heart. Reed also notes that being a landlord isn’t as easy as some people make it out to be. “As a property owner with a tenant, you’ll have to be ready to handle potential problems that may arise at a moment’s notice,” he says. “Even if you choose not to do maintenance yourself, you’ll likely be the one fielding calls from tenants.”

Deciding Whether to Buy a Duplex

Should you buy a duplex and live in one side? Reed says the most important thing to consider before buying a multi-family home is your end goal. What do you hope to accomplish?

“If you’re looking for a way to subsidize your mortgage, you might buy a completely different property than someone who’s buying the first of many real estate investments,” he says.

Obviously, a duplex you plan to live in needs to be a place you feel comfortable — at least for a while. It doesn’t need to be your forever home, but it needs to be sufficient for your family’s needs. Also, it needs to make sense as an investment property when you no longer live in it and rent out both sides.

At the end of the day, it’s all about the financials. Before you buy a duplex to live in, you should calculate potential rental income based on comparable rents in the area. From there, subtract at least 10% of your rental income to set aside for repairs, upgrades, and maintenance. Also remember that you’ll have to pay taxes and insurance on the property. Once you begin the search for a duplex or multi-family unit, your real estate agent should be able to talk over these expenses with you and help you run the numbers.

In addition to making the financials work, you’ll also make sure you’re mentally prepared to become a landlord. The internet is a treasure trove for landlord horror stories, and you have to remember that owning real estate is a lot of work. Not only will you deal with tenants themselves, but you’ll have to complete or outsource maintenance, upkeep, repairs, and cleaning. If your tenant damages your property, which is bound to happen eventually, you’ll be the one dealing with the aftermath — whether you fix issues yourself or hire out for the work.

Related: What I Wish I Knew Before Becoming a Landlord

For this reason and others, real estate agent and expert Evan Roberts of Dependable Homebuyers in Maryland says you may want to consider hiring a property manager to oversee your duplex. While hiring a property manager usually costs between 8% and 12% of your monthly rental income, they can help you avoid some of the headache.

Roberts says property managers can help you find renters, screen tenants, and set a professional tone for your business. But, most importantly, their existence can make living in your duplex less stressful.

“The property manager will act as a buffer so that grievances and requests go to them instead of the tenant knocking on your door,” he says. “The tenants don’t even have to know that you’re the owner while you live next door.”

But, you’ll still be living next door… which means you’ll have a good idea of what is going on with your investment. If you think you can handle the responsibility with or without a property manager, buying a duplex may just be a good way to get started investing in real estate.

Holly Johnson is an award-winning personal finance writer and the author of Zero Down Your Debt. Johnson shares her obsession with frugality, budgeting, and travel at ClubThrifty.com.