In our last post “DUPLEXES: THE ULTIMATE FIRST STEP TO BUILDING WEALTH THROUGH REAL ESTATE” we explored the advantages of making a duplex your primary residence. Benefits to this strategy include taking advantage of conventional loans, low down payments, and tax benefits; all while collecting rental income from next door to nullify your mortgage payments, and increase your borrowing potential.
Owning a duplex can be an excellent crash course on being a landlord, in particularly if you think you’re interested in real estate investment for the long haul. But are you cut out to be a landlord? Especially one that lives next door? Before you run out and buy a duplex, triplex or fourplex (all which can be purchased with a conventional loan) — Let’s explore some of the nuisances of this master move.
We’ve said it before, and we’ll say it again… (Not to scare you, but to prepare you!) Being a landlord is not for everyone. Just googling “Terrible tenants” and scrolling through the plethora of ransacked property images is enough to make some people run for the hills.
Obviously, good management & responsible ownership play an important role in the outcome of any tenant/landlord relationship. Our unofficial poll of investment property owners, indicates roughly 90% of tenant experiences are actually positive. Looking at the 10% that are negative tenant interactions, truly only about 1-2% are so egregious they would want to make you get out of the game. However, you’ll be living next door… Which means you’ll have a pretty good idea of what’s going on with your investment (but also in close quarters, which could make things awkward, should things take a turn for the worse).
We will dive in deeper on “Landlord vs Tenant Responsibilities" in our next post, but here a few drawbacks to at least consider before buying a home that doubles as a rental property:
You will be responsible for learning landlord-tenant laws in your area, the intricacies of leases, and screening of potential tenants. 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. You will need to be extremely careful in your 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 only your tenant, they are your neighbor too.
You will need to be available to your tenants 24 hours a day in case of emergency, or opt for a property manager to do so.
You will be responsible for providing a habitable and safe living environment for your tenants. Basically, you’re on the hook for all the upkeep and repairs to the rental unit, as well as your own. If you’re handy, you may do repairs yourself— Which can be fun and rewarding. However, if you’re not— you’ll need to make sure you leave extra wiggle room in your budget for repairs and appliance replacement.
Property Insurance rates are higher
Rental Income is not guaranteed. You should consider if you will you be able to afford your mortgage without receiving rent, and how much can be set aside for renovations or needed repairs, especially when turning over a vacant unit.
One of the biggest mistakes we see in our industry is failure to run a rental property like the business that it is. You must be able to create boundaries, and follow tenant-landlord protocol to survive. If you have an entrepreneurial mindset, and the right temperament— Purchasing a duplex can be a springboard toward your ultimate financial goals.
At the end of the day, it’s really all about the financials. Wondering what the number might look like? You might begin by calculating 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 (though these are often rolled in to your mortgage payment). This is just a starting point.
If you think you’re ready to begin the search for a duplex or multi-family unit, we’d love to sit down and answer any questions you might have, and help you run the numbers.
Please give us a call, this is our speciality!
Steven Depa (530) 520-8672
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