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Duplex Ownership
in Blog, Investing, Real Estate

Well, hello again, my friends. It is that time. I’ve been working on the website more, so the posting/podcasting was slow going the last week or so. I updated the resources section of the website! Created some nifty boxes in CSS to place the actual text, pictures, and links in. Let me know what you think! I thought it was a good idea to separate them and make the flow of things a little better.

So, over the course of the past six months, That Learning Gal and I have been making one great financial decision after another (with a speed bump here and there). We are paying down at least half of our student debt this year, we created a strict budget (that still lets us have fun and do things, of course), and we have saved over $10k in our emergency fund! All of this while, moving to a new place, starting new jobs, trying to get married, taking a honeymoon, etc., etc. It hasn’t been an easy road so far, but it is definitely getting less bumpy as we go.

That is the way things work as they become habit. They become easier. They seem less rigid, more a part of the normal flow of things. This is the point we are at now with trying to ingrain smart and successful financial habits into our lives. With this ever increasing level of financial sense and well being, we have been asking ourselves what else can we do to try and push ourselves a little closer to Financial Independence. We’ve done small things such as trying to cut out single use K-Cups, and instead, trying to use reusable versions. This saves us a little chunk of change in the long run, as each of those cups could cost $0.50 or more! You can get 30.5 oz of Folger’s (that lasts for months) for the price of 16 k-cups, give or take. Plus, k-cups are way worse for the environment. Well, enough of my coffee rant. On to our idea of what we’re – possibly – going to do to truly begin our journey towards Financial Freedom!

Zillow Duplexes

Duplexes All Over the Place! Image courtesy of Zillow.

The Idea

I was sitting around one dark and cold night a few weeks ago, dreaming my FI dreams and working on the website, when one word crossed my mind – Duplex. It sat there, shining, like a beacon made of gold. A duplex? It was an idea I’d never considered before. I mean, our goal for this year is to try and pay off a majority of our student loan debt, but this new idea was tantalizing, taking over all thought. The possibilities started to race through my head.

A duplex? We could live in one half and rent out the other. We might not even have to pay a mortgage! Imagine it, we’re paying $904/month in rent right now, and we could free up almost $11k/year to do what we please with, we could invest it in the stock market! We could even save up for another down-payment on a second rental property. Maybe another duplex? Then we could use one or both sides of that to pay down the mortgages. Wait, this could snowball into something amazing.

I almost had to start some breathing exercises because I was almost beginning to hyperventilate with excitement. Financial Independence had never looked so clear! I shared my epiphany with That Learning Gal, and a big grin swept across her face. She sincerely enjoyed the idea, although she has always wanted us to have our own house.

Heck, I said, we could probably save up for that first duplex within the next year or so! We are going to have a wedding after all (people like to give money to newlyweds, right?), all of our wedding expenses will be over with, and then we can truly start maximizing our savings. Then like a good foil does, she brought me back to reality, and with it, pulled my head out of the clouds.

Yes, owning a duplex for a first home could potentially be a great idea, but if the research isn’t performed, then how can you possibly expect to make a logical and informed decision? So, inspired greatly, I donned my Learning alter ego and set to work, trying to find out how feasible this idea of owning a duplex for a first home is, the advantages to such a decision and the disadvantages.

The Research

I started my sleuthing with Google. I punched in “is buying a duplex a good idea”? Then I punched in every form of the question from, “what are the advantages to owning a duplex?” to “what are the hidden expenses of owning a duplex”? What I found was mostly heartening, and I want to share my research with all of you! Here’s what I’ve found out so far:

Advantages

  • The number one biggest thing about owning a duplex, is that if you rent out the side you’re not living on, you can pretty much pay for your mortgage (if not have cashflow on top of that). This, right here, is one of the strongest advantages to me. In theory, you’d be living somewhere rent/mortgage free! Freeing up (like I stated earlier) that extra $11k or the equivalent of your rent or mortgage every year. That is a significant savings by any standard. To show you how significant this is, here are some things you could do with an extra $11k…
    • Invest in the stock market with that money! An extra $11k in a Vanguard fund every year can do wonders for a portfolio and put you that much closer to FI. Use a calculator to see how that could affect your stock market FI plan.
    • Put it into your emergency fund. Since most Americans don’t have enough savings to cover a $500 financial emergency, putting some extra cash in there is always a good way to pad your personal safety net (maybe that “new” roof caves in?).
    • Save up for a down payment on another rental!
    • The list goes on and on
  • As you can see, owning a duplex allows you to create more wealth for yourself, with many different avenues available. Without being bogged down by that pesky mortgage or annoying rent, you gain to ability to free up part of your wage for something else (or maybe you double-down on the rental payment! Build up that equity.)
  • The half of your duplex that is rented can get lots of nice and shiny deductions! They are made up of the following, but not limited to:
    • Half of any and all maintenance repairs you put in are deductible (since you’ll probably be doing the same thing to both sides of the duplex).
    • Any advertising you do to get tenants in, background checks, etc., are all deductible as well.
    • Any bills you have to pay on the rented portion are deductible.
      • e.g. you have to pay the power bill while that side remains tenantless.
    • Any shared services are deductible, such as trash, water, landscaping, etc. Just like maintenance, half of all costs are deductible.
  • Finally, from what I’ve read, one of the biggest advantages that people can get from living in an owned duplex is depreciating the side that is rented.
    • “Depreciating” the rental portion of the house means the value of the rental portion of the home “decreases” over 27.5 years.
      • This means you take half the value of the property (or the value of the rented half), divide it over that 27.5 year period, and then write off that amount every year.
      • Example time! Let’s say I have a duplex worth $200k. Both halves are “worth” $100k. Then I take that $100k divided by 27.5, which gives us $3636.37/year that we can deduct.
  • With every mortgage payment you make, you’re building up that sweet, sweet equity.
    • This obviously happens with normal, single family homes as well.

Disadvantages

  • According to the IRS, if you own a duplex, you really have two different properties. One is your personal, residential dwelling. The other is a rental, investment property.
    • This means half of your duplex receives the same tax treatment as a normal family residence.
    • So, this means that only half of your property taxes and mortgage interest payments are deductible; the tax break won’t be as big in that respect. Sad face.
  • Obviously, you will be living next to your tenant(s). However, I believe there is a lot you can do to mitigate this being a “problem”. Ensure you perform strong financial checks, background checks, the whole shebang.
  • If they know you are the landlord (more on this to come), then they could potentially become a headache if they are extremely needy or always want to let you know there is an ENORMOUS PROBLEM THAT NEEDS TAKEN CARE OF RIGHT NOW. Yeah, that wouldn’t be ideal.
  • That sweet, sweet rental income isn’t always a sure thing. So, you’ll definitely have to make it a top priority to advertise and keep peeps in that place as often as possible. Unfortunately, this can compound with picking your tenants carefully and deliberately. If it’s sitting, you’re losing out on money.
  • There is the obvious of property taxes, repairs, income taxes, etc., etc., that comes with the territory of home ownership and being a landlord.

Wrap-Up

As you can see, as it currently stands, this idea is lookin’ better and better. I’m going to keep delving into this because we’re planning on purchasing our first home next year at some point. Do any of you live in duplexes? If so, do you rent one half out and live in the other? Have you ever considered or actually done it? If so, let’s rap about it in the comments. Thanks for reading everyone! As always, I hope you were able to learn something from this.

 




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