Duplex for rent: a great idea to pay the mortgage payment

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Featured Duplex iamge

Duplex means two houses for the price of one. Many new real estate investors love the idea of buying a duplex home, living in one is the side of the property and renting out the other side. Duplex for rent can make mortgage payment process easier.

Duplexes are affordable. In today’ economic situation owning a home becomes challenging gradually. It is a great choice for people who cannot afford to buy a single-family home. Although not too many, it has a few downsides too. In this duplex guide, we try to focus many of its aspect ranging from simple definition to financial matter and in between.

What’s a Duplex?

A duplex or duplex home refers to a structure which contains two separate housing units. It is designed and constructed in such a way that two families can reside under one roof without compromising any privacy. For this reason, they are also called multi-family homes.

However, there are many people who use the term duplex home to refer to any type of housing structure where up to four living units are connected by a central wall. But this is not completely accurate.

Characteristics of a Duplex

Duplex homes are very popular across the united states, especially near big cities. They vary in size, styles and the amenities they offer. But they do share some common features:

  • All duplex design offers two living units. Although the floor for each unit may differ regarding size, shape, and amenities, the floor plan never offers more than two units.
  • Living units are separated by either walls or floors
  • Each living unit features its own private entrance.
  • Duplex plans are adapted well in a neighborhood since they often look more like a home than an apartment building. Many designs integrate various rooflines, offset garages and other exterior features to make the structure appearing cohesive rather than like to units that have been stuck together.
  • Duplex plans offer a more cost-efficient way to accommodate two families rather than building two separate single-family homes.
Bedrooms

These houses are usually being designed with 3 bedrooms. Because a duplex with 3 bedrooms has a great resale potential as it offers the most scalable configuration for a home. It also appeals to the largest segment of the market.

Master Bed

Ensuite master is a trendy feature in the most duplex home. Although privacy is a concern but this feature gaining its popularity because of ease of getting out of bed and stepping into the bathrooms when in rush to get to work. The ensuite master also saves on space.

Floor

When it is about floor plans, duplex properties come with countless floor plans with endless options for customization.

Firewall

Duplex home features common firewall, either separating two stacked apartments or separating two side by side two story units.

Study Space

Today’s design of the duplexes is built with a study nook. Although traditional designs are meant to occupy the whole room that is desirable to many, duplexes nowadays feature study nook to give it a more classy look.

Outdoor Areas

Duplex home features shared outdoor common areas, for example, a front yard or backyard.

Driveways

The duplex property offers two separate driveways.

Entrances

As it is expected, the property also offers two separate entrance to maintain privacy.

Garages

A double garage is a common feature of the duplex property. It is a vital commodity for many families since nowadays more space is required to store many of today’s’ car design and larger cars. Each garage can house 2 average sized cars and they have plenty of storage available for other tools, garden furniture or even setting the gym.

Materials

Whether building or purchasing a duplex, it is important that you are utilizing the right materials. Both home buyers and owners need to make an informed decision regarding materials to avoid incurring extra costs of repair. Builders came to realize that buyers are no longer like the ugly one color brick veneer duplex. Having a smart finish is also important such as the use of the 1 /2 cladding types mixed in the brick veneer can give your duplex a very elegant finish and a cost-effective appeal.

Should You Buy a Duplex?

Buying a duplex may be a good start investing in real estate. The first thing to consider is would the place be comfortable- at least for a while. It does not need to be your forever abode, but it needs to be sufficient for your family needs.

The most convincing point in favor of buying a duplex home is you can subsidize your mortgage and housing costs. From homeowners’ point of view, buying a duplex is attractive because you can collect rent for a portion of the property while living in another. This can be a significant help while paying off your mortgage.

Another favorable reason is duplexed tend to cost less per square meter than brand new condos. You can buy a larger duplex than a condo for a similar price.

In addition to financial gain, you will also need to consider how will you like or dislike the role of a landlord. Being a landlord has many advantages and disadvantages. You need to consider those things carefully.

However, the weakest point that may resist you purchasing a duplex is rental income is not guaranteed. Because of the uncertainty of finding tenants. So, ensure you buy something that is easy to market.

Things to Consider Before Buying a Duplex

Living in a multi-family home while one side is occupied by you and renting out the other unit is a great way to build wealth. But the idea is not as simple as it may sound. Most of us cannot afford to buy a few single-family homes as rentals while affording our own home. This is why many families find it out that purchasing duplexes or even multi-family units to is economically profitable in many aspects.  But before venturing into such endeavor, consider below things:

You will have limited location options

It is always not possible to purchase a duplex, triplex or quadruplex in any locations. For example, in San Diego, multi-family units are not available in many of the suburban cookie-cutter type neighborhoods. In this area, you will have to search in the more urban/downtown type areas or expensive beach communities like Ocean Beach or Pacific beach.

Finding a multi-family home is even more difficult in a more rural part of the United States. But whatever the difficulty, buying one multi-family unit in those areas will open the door for you to make some good money over time.

Cooperation with a real estate Agen

The most common way to find properties is using MLS. It is the list of properties for sale through other agents. If you are buying a property listed on the MLS, you need to find out a great real estate agent to work with. But do not worry. Since real estate agents are usually free for the buyer, as the seller pays the fee. Find an agent who has the following

characteristics

  • Have experiences working with first-time homebuyers.
  • Have experiences about duplex and other small multifamily properties
  • Teach-savvy
  • Quick to respond to any property related questions
  • Have patience
  • Always available to help you

Space Requirements

When looking for a duplex home, you need to check out that it meets minimum space requirement. The space requirements are as follows:

102 square meter(Min Lot size(6m x 15m=90 sq.m)

The above space would accommodate 2 bedrooms, 2 bathrooms, 1 Car Garage, 1 living, dining, kitchen, balcony, and laundry area.

Ground Floor area-61.25 sq.m; second floor area-41.15 sq.m

Debt to Income Ratio

Debt to income is a ratio that compares your monthly debt expenses to your monthly gross income. In order to calculate the debt-to-income ratio, sum up all the payments you make toward your debt throughout the month.

These debts include monthly credit card payments, car loans, other debts (for example, payday loans or investment loans) and housing expenses—either rent or the costs for your mortgage principal, plus interest, property taxes and insurance (PITI) and any homeowner association fees.

Divide your monthly debt payments by your total monthly income(your income before taxes are deducted) to get the ratio. Multiply the ratio by 100 to show it as a percentage.

For example, if you pay $500 on credit cards, $300 on car loans, and $1,500 in rent, your monthly debt is $2300. If you make $65,000 a year your monthly gross income is $5,416. Your debt to income ratio is $23,00 divided by $5,416 which works out to approximately 0.42 or 42 percent.

To purchase a duplex, your debt to income ratio need to be low with a large down payment means around 25 percent of the purchase price or more. Usually, debt to income ratio of 36% or less is a favorable condition to own a duplex home.

Legal Aspects

when renting out the other part of the duplex, selecting right tenants is by far the most important aspect. So, knowing a few fair housing laws are important because in that way you can be assured of that you are not inadvertently violating any federal fair housing laws. Below are a few of these laws:

You cannot legally rent the unit to more than three unrelated persons that translate a family of 5 or 6 could legally live in that space.

It is legal to tell someone that you cannot rent the duplex unit to them because they have too many people.

However, you cannot tell someone that you don’t want them because they have kids. That will violate fair housing laws.

Taxation Policy on Investment Properties

The internal revenue service (IRS) taxes the investment properties in two primary ways: income tax and capital gains tax. Rental income is taxable as ordinary income tax. That implies that you have to announce it as income on your tax return and pay income tax on it by April 15th of the year after the year you purchase the property.

Rental income receives gentler tax treatment than income earned from wages. Unlike wage income, FICA taxes are not imposed rental income. Your rental income is everything you get from rents and royalties on the property, minus any deductible expenses. But you cannot deduct everything.

You can only deduct mortgage interest and repairing cost that restores the property back to its original functioning condition. You cannot deduct any building of new structure or renovations. Only repairing cost is acceptable to deduct.

Capital gains tax

The second tax bill you need to be a concern is capital gains tax. It is the taxes that IRS impose you on any net profits you get out of a property when you sell it. If you own the property for less than a year, you would have to pay short-term capital gains, which is the same rate as your marginal income tax rate. But if you are in the 28 percent tax bracket, you will have to pay a 28 percent tax on short-term capital gains.

Property taxes

You need to pay property taxes to local and country governments each year. Your local government holds the authority of assessing the market value of your property and charge you a percentage based on that value every year.

Other tax deductions

  • Mortgage interest
  • Tax advise and preparation fees
  • Legal fees (for business purpose only and not for personal causes)
  • Advertising fees
  • Mileage

Thoughts for the Future

The future shape of housing in the U.S cities and suburbs will certainly change significantly. Whether the property is detached, attached, part of a residential cluster or a multiunit building, more and more establishments in coming decades will look less and less like the home you are now currently residing or the home where your parents grew up.

Future housing types will predominantly be influenced by substantial changes in household demographics and lifestyles. Furthermore, evolving technological innovations in conjunction with economic conditions will make homes increasingly less affordable. In that perspective, as the duplex home is more affordable than single-family housing, it will get more popularity.

Smart Ways to Invest in a Duplex House

How to invest in a duplex house in smart ways? Any financial investment needs a thorough calculation to avoid incurring losses. Below are a few smart ways to invest in a duplex house:

Renting out one and living in another

If you’re keenly interested to become a homeowner, buying a duplex can help you kill two birds with one stone. It will not only secure a roof over your own head but also you can rent out for profit. Further, you could use the rental income to either reduce your own cost of living or snowball into more real estate investments down the line. You could even do both.

Enjoying Tax Gains with Owner-Occupancy

When you proprietor of an owner-occupied duplex, in a practical sense, you own two different properties. The half of the property you live is considered just like a house, but the other half can be treated as an investment property. Below are a few tax advantages you will enjoy as an owner of a duplex home:

Homeowner’s benefits

The internal revenue service (IRS) offers every taxpayer to claim the standard deductions in a form name as Schedule A form. In that form, as the resident of half of a duplex, you will be able to deduct half of your mortgage interest, half of your property taxes, and half of any deductible points that you pay.

Investment property benefits

You will be able to report regarding the income and expenses of the tenant-occupied half of your duplex on a Schedule E form of IRS. In that form, you can write off advertising fees, repairs that you make, insurance on the unit, and even snow and lawn services.

Dual-use Expenses

The IRS’s rules allow you to write off half of any expense that you incur that benefits both your side and your tenant’s side of the duplex. This eventually let you deduct a portion of your expenses. An example will make it clear. The city of Portland, Oregon’s garbage service charges $33.90 per month for a 35-gallon garbage can. But upgrading to a 60-gallon can, which is almost twice the capacity of the 35-gallon can increase the price to $42.00.

When you pay for the garbage service in your duplex, you would be able to deduct $21 a month as a tenant expense. In other words, you are paying $21.00. But think it otherwise. If you would live in a single-family residence, you would have to pay $33.90 for garbage service. So, in effect, you can save $12.90.

Tax treatment on selling

When you sell an owner-occupied duplex, you will get certain benefits over selling a rental-only duplex. Rental properties are subject to capital gains tax and depreciation recapture tax during their selling. When you sell your duplex in which you also live, you get to exclude up to $500,000 of the gain from capital gains tax and do not have any depreciation to pay back. Since your duplex considered as two properties, only half of your sale proceeds will be subject to taxes.

Help with Taxation

When you own a rental property, not only can you make money on your duplex but also enjoy certain investment and tax benefits. These are given below:

Operating expense write-offs

When it is about to report the income you earn from your duplex property you can claim to deduct all your operating expenses, as long as the IRS(Internal Revenue Service) would see them ordinary and necessary. Your operating expenses not only include obvious things like what you spend on property taxes and interest or utilities and maintenance, but it will also include things like management fees, a portion of your cell phone bill if you use it for rental purpose, or even the expense commuting to the property if you don’t reside there.

Depreciation

The IRS allows you to depreciate your building as well. To depreciate it, get the help of a certified tax professional and determine the value of the building alone. After determining the value of the building alone, divide it by 27.5, what IRS perceives the building’s lifespan to be. You can then claim that amount every year for up to 27 years, and half a reduction in the 28th year. This reduces the taxable income from your duplex while having to spend anything out of pocket.

Passive activity losses

In addition to having the ability to write off depreciation and soft expenses like building related travel cellphone usage, chances are that you end up with a taxable loss on the property. The IRS may let you use those losses to offset other income on your return.

You are allowed to claim up to $25,000 per year if your gross income is $100,000 or less. But you lose $1 of a write-off for every $2 of income above $100,000 which means that if your annual gross income is $150,000 or more you cannot claim the write-off.

Capital gains Shelter

When you sell investment property, you will have to pay two types of taxes. One is capital gains tax on your profit and the other is section 1250 recapture tax on your accumulated depreciation if you sell more than your depreciated basis.

Since a duplex is considered as an investment property, you can do a tax-deferred exchange if you choose to use the proceeds of the sale to purchase another investment property. IRS section 1031 lets you carry your basis forward and avoid having to pay taxes until you finally cash out of real estate someday or the law changes.

Owner-occupied Duplexes

When you live in one unit of a duplex, nothing changes significantly from a tax perspective. On record, you have houses. The half you live considered as a personal residence and the half you rent out treated as an investment property.

There are some certain benefits to this. You can divide the cost of any shared expense equally between your unit and your tenant’s unit. For example, if you spend $60 per month for an Internet connection that you share with your tenants, half of the expenditure is deductible. That means you can pay $300 per year instead of $600.

Some Advantages That Might Interest You

After the last decades mortgage debacle, real estate prices at rock-bottom in many places around the country. In this scenario, some people are buying homes as an investment property expecting that home value will increase again. Duplex’s great advantage lies there. The property is affordable while offering you a place to live and rent out the other portion. Below are a few advantages of owning a duplex:

Being a landlord

Being a landlord means you can set all the rules regarding pets, smoking, and landscaping. But it has some major drawbacks too.

Affordability

On average, living on one side of a duplex while renting out the other side is more economical than living in a single-family home with a similar number of bedrooms, bathrooms, and other amenities.

Help with mortgage payments

One of the major advantages of owning a duplex home it helps you paying out your mortgage payments. For example, your monthly mortgage payment is $1,900 and you rent out the other half of your duplex for $1,000. So, you need to add $900 for making the mortgage payment instead of $1,900. You also pay off your mortgage even faster by making extra payments on the principal.

Tax deduction

When you own a duplex home, you can usually write off certain expenses like repairs to the rental unit. But when you live on site, you can deduct a portion of common area maintenance that impacts both you and tenants like landscaping or snow removal.

A chance to allow A favorite family

If you have an elderly family member, or someone needs special attendants or just start a new career, in all of these cases that family member can stay in the other half of the unit. The family member can enjoy a degree of independence while not going too far from your purview.

Security

Having a resident close to you means you can get assistance in case you need or watch over your place when you are not there.

Disadvantages of a duplex

While investing in real estate has a few potential benefits as we have seen above, but there are downsides as well. These drawbacks are inevitable if you share the property with your tenant. These drawbacks include:

Trouble setting boundaries

Tenants may seek your help in any kind of property related problem at any given time if you live side by side. You cannot set any rule saying that you will not available early in the morning or during the weekend. But things would have been completely different if you live elsewhere.

Lack of privacy

While living with your tenants on the other unit of duplex means you would be sharing a floor, ceiling, or wall. So, you have to deal with all the noise, smell, aesthetic, and parking issue that would come from other occupants of the property.

Responsibility for repairs

Since you are the landlord of the property, you need to fix anything that breaks in the other unit. Maintenance, repairs, and cleaning are a routine task of a good a landlord. So, before purchasing a duplex think twice how would you tackle these issues.

Difficulty Finding good tenants

Nothing could be worse than having bad tenants. They can cause trouble in multiple ways. But the two most troubling things are when they do not treat a property that they should suppose to do and do not pay rent their rent on time. These two things are enough to make your life a nightmare.

Final Thoughts on Duplexes  (Conclusion)

As you can see there are many aspects associated with buying a duplex property. While there are not any huge drawbacks that can discourage you from buying one, but a few significant advantages can really impress you. Especially, many duplex owners love the idea of living in one area and renting out the other half to ease out their mortgage payment.

If you decide to buy a duplex, take time to select people who share the same value with you. In such a way, you can make a much more enjoyable living experience.

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