Expert Q&A

Advantages, drawbacks to owning a duplex


Renting out half a building while living in the rest can be a path to greater wealth, or to grayer hair, depending on the property and your landlording temperament.

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Question for the expert

Dear New Frugal You,
Why is it that so-called financial planners like yourself never mention buying a duplex house that provides tax and expense benefits plus income? Is it because financial planners can’t see beyond the products that they sell? If a person’s income were increased by owning the duplex, might they have more money to invest in other products? Or is that too tough for financial planners to figure out? — Disgusted

Answer for the expert

Dear Disgusted,
First, let me begin by saying that I haven’t earned a fee or commission for selling any financial product for a number of years. Nor can I collect any real estate commissions. So I have no financial stake either for or against real estate investments.

Next, let me point out that fee-only financial planners (the type that I recommend) don’t collect a commission on sales, either. They charge either an hourly fee or a percentage of assets under their control. So their advice isn’t biased by any sales commission.

If you choose to use a professional who is paid by commission, then you would expect them to show you the products that they know best and that would earn them a commission. That’s true of stock brokers, insurance salespeople, financial planners and real estate agents. It’s also the reason why you want to know how any adviser is compensated.

Now that we’ve gotten the hostilities out of the way, let’s look at both sides of investing in a duplex. As you say, there are some good reasons to own a duplex. But there’s also a downside that prospective buyers need to consider before they sign a purchase contract.

First, the good stuff.

Your duplex could appreciate in value, and perhaps more than a single family home. There is no guarantee, but in the long, run real estate values do trend upward. A duplex is more expensive than a comparable house and likely would appreciate more.

Your tenant will help pay your mortgage. Rental income should cover a large part of your monthly mortgage payments.

And, as you point out, unlike the situation with a single-family home, with a duplex you’ll be able to deduct certain home expenses. That can make upkeep easier to afford.

Since you’ll be living in the building, it’s easy to protect your investment. If the tenant’s lifestyle is putting your investment at risk you’ll know quickly.

It’s also easy to check out renter problems. You won’t have to guess how bad a plumbing problem is. You can walk next door and inspect the situation personally.

But, Disgusted, there are also some potential problems to consider before buying and moving into a duplex.

You could have times when the rental unit is empty and won’t be bringing in any income. During those times you’ll need to cover all the mortgage and other expenses yourself.

Privacy can be an issue in a duplex, whether you’re a landlord or not. You share a common wall. Sometimes that becomes a problem.

Also, living next door to your tenants makes complaining very easy for them. Some landlords duck calls from tenants who constantly complain. That’s hard to do when they can see you pull in the driveway.

Some renters may damage your property. Even if you’re very careful selecting tenants, you’ll need to freshen up the unit before showing it to new potential renters.

There are some other things to consider that aren’t necessarily pluses or minuses, but which could help you to decide whether to move forward.

Try talking with people who have owned rental properties for awhile, especially if you know them well. They’ll be able to share insights that will be most relevant for you.

It’s important to know your temperament. Do you have a “landlording temperament”? Some of us handle unexpected surprises well. That can be an important personality trait when you’re dealing with renters.

You’ll also need what it takes to protect your investment. It’s not easy demanding past due rent or forcing a tenant to leave.

Have a plan for handling repairs. How much will you try to do yourself? How many hours per week or per month are you willing to devote to repairs/maintenance? Know who you’ll call when you need to pay for repairs, and how you’ll cover the maintenance when you’re on vacation. Remember, too, that while a repair service is probably a deductible expense, your time is not.

Know how you’ll screen prospective tenants. You will want to screen them for financial reasons, and you may want to include some rules in the lease about smoking, noise and pets.

Find out what property insurance will cost. Having a renter under your roof could make a big difference in rates. You’ll need to include that cost in your profit calculation.

Talk with an accountant. Some of your expenses will be deductible on your federal income taxes. You’ll need to know which ones qualify and how to keep track of them.

Disgusted, you may be right that not enough financial planners consider or advise owning a duplex to build wealth. But that decision isn’t a slam dunk. It should be carefully considered before any purchase agreements are signed.

See related:  Tips for owning a duplex, Credit card cash advance for a down payment? Don’t

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