Moving On To The Duplex

Category: Finance, Real Estate.

There is a lot of talk about getting your first house. But maybe someone's first home should instead be a duplex.

It's part of the American Dream to get a house and maybe get a dog named Rover. Why would I propose such a thing? No, there are simply too many advantages to buying a duplex first. Is it possible I am a secret Russian spy that hates American pie? Buying a duplex has a number of financial advantages over buying a house. This is rarely the case.

A lot of people assume that duplexes would sell for about twice of what a house sells for in the same neighborhood. Duplexes are more frequently about 5 times the price of a house in a given area. So let's compare buying a house to a duplex. So to pick an easy number if a house is selling for 100k then a duplex should be selling for 150k. To keep things the same let's assume we have 20k to put down and we are looking in the Austin real estate market so that the taxes are 5 percent of the purchase price and insurance is 4 percent of the purchase price. To start off with let's look at the house. Lower Monthly Payment.

For the house we are going to have a 5 percent interest rate. Monthly Payment= $7432. We can use this mortgage calculator. 100k house price. 20k down payment. Moving on to the duplex. We are also going to assume that the other side of the duplex is being rented for$ 65 150k duplex price. 20k down payment. Since duplexes usually have higher interest rates we are going to assume a 7 percent interest rate. Monthly Payment= $11818.

Monthly Payment minus rent= $5668. Rent Payment minus 5 percent vacancy= $6150. The monthly payment on the duplex comes out to be 38 less than on a house. In most areas a duplex leads to a lower monthly payment but there are a few real estate markets where the opposite is true do always run the numbers. You might get different numbers based on your area. Increasing Your Future Real Estate Purchasing Power. Buying a duplex first allows you to make additional purchases while buying a house first can negate your ability to buy additional properties.

Besides the advantages due to a lower mortgage payment there is another advantage over buying a duplex first. To understand why this is the case we need to understand a few rules about how banks determine whether or not to provide loans. So if a buyer first buys a house and then wants to buy a fully rented duplex they will need to be able to qualify for the full price of the house and the duplex combined. When you are purchasing your first investment property banks will usually not count the rent as income unless you have owned investment properties for over 2 years. This can be difficult especially for someone in the beginning stages of their career. Faster Payoff. If a buyer purchases a duplex first, in 2 years when they are looking for a house they can count the rent from the duplex as income which can help them qualify for the bigger house purchase.

Another interesting way to look at it is that if instead of simply spending the saving you incurred by owning a duplex if you were to pay off your mortgage faster. But if you paid your duplex of$ 5668 and then took the additional$ 1864 and applied it to your mortgage you could pay off your duplex in 15 years. So if you applied$ 7432 to your house it would take 30 years to payoff. So in 15 years you would have a$ 150k duplex paid off instead of a$ 100k house partially paid off. Not only will you pay off your duplex faster but once you paid if off you will be in a better position. Greater Benefits of Mortgage Payoff.

Once you pay off your house you are living mortgage free but not payment free. In contrast once the duplex is paid off you are not only living in your duplex for free you are actually getting a profit of$ 255 a month. Based on the original assumptions( Austin Texas 5 percent tax rate and 4 percent insurance rate) you are still making a payment of 2466 a month for taxes and insurance. Buying a duplex is not for everyone. And our article is not proposing that everyone should buy a duplex. Some people do not want the hassle of managing a property. But there are financial benefits to buying a duplex so take it into consideration.