Should you Buy a Duplex or Buy a House

Which is better, buying a duplex (when I say Duplex I'm including the words duplex, triplex and fourplex as the same) or buying a house.

Let's use the example as an owner occupied building first and then I will talk about the the Investor Buyer secondly.

As an owner occupied building, meaning one that the buyer lives in, you have the choice of either a single family dwelling or commonly known as a "house". Or, you can buy a multi-family structure more commonly called a duplex, triplex or fourplex.

In case you have not visited other parts of this web site a fast refresher. Five units or more is considered a "commercial" building and requires a "commercial loan", which is much more costly for the average family. Hence, the word "residential" means 1 to 4 living units only, as defined by the lending Industry.

So, say we go out and buy a house. A typical 3 bedroom 2 bath ranch style tract home. We pay the full monthly mortgage on the house every month, along with the insurance and property taxes. If the house is located within a newer development (especially in the western part of the United States) there is a good chance you also have monthly or quarterly Homeowner Association dues.

Now say your a busy person and gardening is not your thing so you hire a landscape company to mow your lawn and tend to the landscaping.

Let's see, if we add up the monthly expenses (we are assuming the property is located in California, so bear with us if the numbers seem might high to your location).

Mortgage                   $1970 (price was $400,000 with 20% Down)

Taxes & Insurance        $462

HOA Dues                      $50

Landscaping Co.             $75

TOTAL COST               $2557 monthly

Now we buy a duplex and rent out the other half. Same 3 bedroom and 2 bath for each side, so both the house and duplex will have the same room counts for each living unit and of course the duplex will cost (purchase price) a little more than the house.

The Typical rents for a duplex in the East Bay of the San Francisco Area is about $1500 per month for a 3 bed, 2 bath unit. So our monthly cost are:

Mortgage                 $2586 (price $525,000 with 20% down)

Tax & Insurance         $585

HOA Dues                  $0

Landscaping Co.         $75

TOTAL COST              $3246 (before rental income)

Minus rental income   -$1500

REAL MONTHLY COST   $1746 Monthly

A saving of $811 per month, as compared to the monthly house cost

Plus, on your annual income taxes; with the home you can ONLY write off the interest on the mortgage and property taxes as a tax savings.

While on the Duplex you get to write off the interest on the loan and the taxes PLUS 1/2 of the Insurance cost for the rental half of the property, Plus the cost of the landscaping company and you get to depreciation the half of the duplex that is a rental.

Any minor repairs on the rental unit is also a write off, while NO repairs on the house can be written off on your taxes. (depreciation for this duplex would be 1/2 of the cost of the building - the rental half, minus the land value, divided by 27.5 years, which in this case equals about $7909  per year).

SO...Which is a better investment a house or a duplex ?

Plus, as time goes by, the rents on the duplex will increase, which in turn lowers your monthly expense even more.

Still not convince ? Well you can buy a nice property here in the Bay Area that has a house in the front and a duplex in the rear (triplex property).

Then you have the best of both worlds. You live in a single family home, but have a duplex in the rear that pays for most of your living expenses. For more information on this topic please review our section called Benefits of Buying.

Ok, now for the Investor. As you may know, most Investors buy an income property based on the Gross Rent Multiplier (GRM) or the Capitalization Rate Method (Cap Rate).  Using the GRM method, the higher the rental income is on a property, the more valuable the property becomes. Likewise with the Cap Rate, the lower the Net Operating Income (NOI) is,  the higher the value of the property becomes (one way to lower the NOI is to increase rents).

On a rental house, it doesn't matter how much you increase the rents, the value is still tied to the value of the home that just sold down the street of the same style and floor plan as your house. Houses are NOT valued on the rental income they produce. They are valued on what sold within the local neighborhood (market approach). So a couple of foreclosure homes in the neighborhood can really impact (decrease) the value of your rehtal house.

While a foreclosure of a duplex down road from your duplex has no effect on your property, as investors are looking for income streams that a duplex produces, not what similar properties may have sold for.

So, once again which is the better investment a duplex or a house ?