Author Topic: To purchase a single family home or duplex?  (Read 737 times)

mattmando

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To purchase a single family home or duplex?
« on: September 06, 2018, 12:29:09 PM »
My wife and I are starting to look at buying our first home.  We have $240k saved for a down payment and can afford a $3700/month mortgage.

We're in the Los Angeles housing market where homes in our price range ($6-800K) are in really poor shape. To counter this we are considering a duplex where we would rent the second unit to get into a higher quality property and build equity faster.

I would appreciate any advice on the pros/cons of each scenario and am open to other suggestions of how to best position ourselves as first time homebuyers.  Thanks in advance!

ps. more details about us: We're DIY inclined but don't have experience renovating a property. My father is a landlord for several small income properties, so I have a secondhand knowledge of the work required, but no direct experience as a landlord.

Lucky Recardito

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Re: To purchase a single family home or duplex?
« Reply #1 on: September 06, 2018, 12:48:42 PM »
FWIW, this sounds similar to our situation. We're in a similarly HCOL area and originally investigated spending ~$600K on a SFH, but that wasn't a realistic price to get something we actually wanted. Instead, we wound up spending ~$800K on a 2-unit property. We live upstairs and rent out the downstairs unit. We've been here about 2 years -- here's what we've learned/observed:
- At least in our city, we needed 20% down to buy a duplex, period. There was no such thing as a 5% or 10% down loan for a multi-unit property. Sounds like you'll have that available (and we eventually did to), but that caught us by surprise. Additionally, since we were in jumbo loan territory (again, where it sounds like you'll be), a 30-yr fixed loan also was not an option. We're on a 7-1 ARM, which wasn't something I thought I'd be comfortable with originally, but we adjusted our thinking and I feel okay about it (partially because the rate is fantastic right now... I may change my tune when we need to refi or accept an adjusted rate in ~5 years...)
- When we got our mortgage, they were NOT willing to include future rent in our income for the loan application. That didn't matter for us (we had enough employment income to qualify for the loan anyway), but worth noting in case your expectations are different.
- Good tenants are magical. We lucked out in that we inherited great tenants with the building, and they've stayed so far -- but I've now heard enough horror stories from other landlords that I know tenant quality is a huge factor in landlord happiness, especially if you live there. We really try hard to think about having a neighbor first and a tenant second, and to be polite and friendly. Plus, a super-great tenant is a built-in plant-waterer and cat-feeder when you're out of town (as long as you're game to reciprocate!).
- This probably varies in your area, but in our city the fact that we occupy the building we rent out gives us broader rights as landlords than if we did not live in the building. We can be pickier about tenants and are subject to fewer rules.
- We've found that since we live in the building ourselves, the direct costs of the rental unit are pretty minimal. If we lived in a SFH, we'd still be maintaining the roof, basement, garage, and yard anyway -- so we've only incurred a few hundred dollars of costs directly related to the rental unit. (Granted, we haven't yet had a vacancy or a major repair, so this will probably change.)
- We have found it worth our while to keep a real estate lawyer in the rolodex for questions -- I felt much more comfortable writing our first lease after paying someone a couple of hundred dollars to make sure I was doing it right and protecting us properly.
- We like that having a second unit makes the finances work well now... but it also gives us a lot of options in the future. If an older family member needs to move in with us, we have an option to house them on-site. If we wind up with more children than we've planned (or whatever) and want more space, we can take over the whole building. More options than if we were in a SFH.
- We're in a neighborhood that is quite expensive, and where rental units are being knocked down in favor of high-priced condos, which helps drive economic segregation in the city. We felt good, quite frankly, about preserving a rental unit in the neighborhood.
- If you DIY your taxes, start figuring out how a two-flat will impact your taxes. Learn about depreciation and how to track expenses. There are some good threads on the real estate forum here!

rothwem

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Re: To purchase a single family home or duplex?
« Reply #2 on: September 07, 2018, 04:33:44 AM »

I bought a duplex. I would do it again if the situation were the same, but I had/have a very specific stipulation when buying a duplex—I’ve got to be able to comfortably cash flow with both sides rented.  Duplexes don’t appreciate like SFHs, so you basically have to plan to keep it forever.  I doubt you’ll live in a duplex forever though (we didn’t) and you have to be able to make money with it rented because you probably won’t make a lot when you go to sell.


- We've found that since we live in the building ourselves, the direct costs of the rental unit are pretty minimal. If we lived in a SFH, we'd still be maintaining the roof, basement, garage, and yard anyway -- so we've only incurred a few hundred dollars of costs directly related to the rental unit. (Granted, we haven't yet had a vacancy or a major repair, so this will probably change.)

Just FYI, in a duplex, you can deduct half the cost of home stuff that impacts both units. A roof for example, if it costs 10k, you can put 5k of it on a depreciation schedule for capital expenditures.

Lucky Recardito

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Re: To purchase a single family home or duplex?
« Reply #3 on: September 07, 2018, 07:08:54 AM »
 

- We've found that since we live in the building ourselves, the direct costs of the rental unit are pretty minimal. If we lived in a SFH, we'd still be maintaining the roof, basement, garage, and yard anyway -- so we've only incurred a few hundred dollars of costs directly related to the rental unit. (Granted, we haven't yet had a vacancy or a major repair, so this will probably change.)

Just FYI, in a duplex, you can deduct half the cost of home stuff that impacts both units. A roof for example, if it costs 10k, you can put 5k of it on a depreciation schedule for capital expenditures.

[/quote]

Indeed! This is part of my note re. learning about depreciation & tracking expenses... something I didn't point out but that rothwem has noted, is that the splitting of maintenance costs between owner & rental units essentially makes some of the costs of maintaining our home tax-deductible. (For us it's 38/62 rather than 50/50, but it works!)