With or without the experience, this guide explains how you can house hack a duplex successfully. Generally, house hacking involves using a property to generate extra income to offset living expenses.
House hacking typically involves having a renter pay you monthly rent. If you are an inexperienced buyer, no fears, house hacking a duplex is incredibly easy.
With an FHA loan, you can get a duplex for as low as 3.5% and then have a part of the unit occupied by tenants. Even more, you may be able to get the property with an empty pocket. That said, this guide will also help you cut down on your monthly expenses.
Between duplex house hacking & renting a room
You’d probably wonder whether it’s better to get a roommate and rent a room in your house or house hack a duplex and share a part of it. Well, you’d make additional cash with either strategy, but many people are often not able to sustain renting a room due to sharing your personal space.
House hacking through room rental is often frustrating and difficult if you largely prefer:
- having your own space;
- not having to set many more ground rules;
- not working out utility payment; or even
- how to get around a sour roommate relationship.
In a duplex, there would be no need to share the kitchen or have a series of conversations about bathroom cleaning. Moreover, you and your tenant will each have dedicated spaces.
In essence, you get to have your space while also benefiting from a renter when you buy a duplex instead of a single-family home. That’s not to say that house hacking a single family home is a bad idea—not at all.
How to house hack a duplex
House hacking a duplex may not be as tough, but it’s also not a walk in the park. Below are core considerations and tips to get you through.
1. Locate the right property
Persistence with your search can get you the right property, though, it’s easier said than done. There are many forms of duplexes, with the traditional ones coming with a laid-out floor plan and multiple garages. However, those with a smaller living space fitted with a live-in basement and kitchenette after the first structure are less traditional.
Search your local area for what works best for you. Besides, any property with dedicated spaces and an address is considered a duplex.
Some investors looking for the most money possible to offset their expenses choose to stay in the smaller area while renting the larger part of the duplex. This may not be worthwhile if you have a larger family or desire more space.
To find your first property, you may need the services of a realtor with experience. Have the realtor send in details of properties that meet your criteria by setting you up with MLS alerts via email. You can then go for an inspection when you find a matching property.
Look out for the following when inspecting your potential, new property:
- basement water
- roof age
- doors and windows condition
- condition of the bathroom and kitchen
- condition of the paint, etc.
Budget the cost of repairs in your estimate as you may not find a house in perfect condition at a good price.
Try to make an accurate model of how much you’d save for repairs and maintenance monthly and estimate the cost of major repairs necessary for the building.
You want to buy a duplex that makes sense on paper. Do not be emotionally invested, so much that you’re tempted to offer on a nice property. Remember: this is a business, so you want an investment with sufficient margins that’d still be okay if things don’t go as expected. You are driving into a disaster if you buy a property that hardly cash flows on paper.
An agent can help you make a good offer when you find the right property. For every offer, be sure to include a convincing personal letter for a chance to win the house in case the owner receives two similar offers.
You may have to enter some minor changes when reusing the letter on other duplexes you make offers.
Note that you are under contract once your offer is accepted.
2. Buy the duplex and calculate cash flow
You are ready to buy once you have decided on the duplex you want. A great option for first-time home buyers is to invest in a duplex with an FHA loan to secure a large asset with very little down payment.
It’s quite better than traditional loan programs requiring you to make a down payment between 20-25% to buy a multifamily property—Rocket Mortgage, LLC.
With an FHA loan, you can make a down payment of just $10,500 to buy a property of $300,000, compared to up to $60,000 on a traditional loan.
Instead of saving many years to purchase your first duplex, go for a smaller down payment to buy the house sooner. The downside is that your monthly payments will be higher.
Analyze the numbers before choosing a particular property. Know how much to rent out one side by researching rentals in the local area. Also, figure out how much it will cost to upkeep the property since you’d be responsible for repairs and upgrades to avoid getting in a legal mess with tenants. You should get a clearer picture of your monthly costs after calculating the following:
- repair costs
- insurance, and
Make sure to figure out if you can afford a duplex to establish a good idea of what you need. Do not overspend and end up regretting your decision. If you do not have the money for a duplex, perhaps, you should buy a smaller property that guarantees extra cash for other investments and savings. Depending on your situation, you might be interested in my tips to live poor and save more.
An FHA house hack financing can be more difficult compared to a conventional loan. A good agent and lender should help you navigate the FHA financing process since properties need to pass a more rigorous inspection. For instance, peeling paint is prohibited.
Consider an FHA 203k renovation loan or do the work before closing since potential deals could get limited. It is also important to get pre-approved before scheduling showings. Otherwise, no seriousness will be given to your offers.
3. Move in and house hack
Find a renter immediately after closing on the duplex. If necessary, have the unit renovated. Understand that the longer it takes to find a renter, the less money you’d make and save from the investment. Of course, time is of the essence.
When renovating, ensure to get it right the first time, even if you need to cut costs with personal labor. It is better to do something right the first time rather than cutting corners on repairs just to make it ready for an available renter. This could make you more of a slum lord than a landlord.
Search for renters and list your apartment once the unit is ready. Before accepting applications, have screening criteria to help you know what you’re looking for in an ideal renter. Usually, it helps to rely on the common industry standards by screening renters following:
- credit scores
- background checks
- income, and other factors
Consider other factors like pet policy. At this stage, it may be better not to admit tenants with pets or specific pet breeds to reduce potential property damage and repair costs. If you must allow pets, you may have to collect fees like pet deposits and pet rent. Make sure to read your local policies on pets so you don’t get in trouble. Also, note that you may not discriminate against some pet owners. For example, a specific renter’s pet may qualify as an emotional support animal (ESA).
Pick a date for the move-in after sending the lease. You may want to take pictures of your duplex before move-in to help decide your charges in the case of a move-out.
Hand over the keys. But first, request renters insurance and collect the deposit and first month’s rent.
Rent payments and tracking of payments can be made easier with a tool like apartments.com. You should also get rid of potential late rent excuses using automated emails to remind your tenant.
Read also: how you can tell a renter’s pet breed
4. Look forward to other investments
Perhaps, you should already look forward to your next investment after a successful house hacking of that duplex.
Go ahead and rent out both units after moving out to establish a good source of monthly cash flow for income. It’ll even be helpful even after you’ve paid off your mortgage and set aside cash to cover costs.
Consider a 1-5 year plan to move out of the house hack and secure a cash-flowing real estate investment. Just lower your monthly expenses by staying on one side to save more money for your next property.
Start now to invest in that duplex and grow your investment portfolio through house hacking. Don’t hesitate to purchase an investment property that will fetch passive income and cash flow for years. It’s better than spending on a “dream home” with high monthly payments that take years and may force you to default.
Use that money for an investment property that can cash flow for years, fetching your passive income and asset equity. You may move after some time to pursue your dream home—just invest for now.