Buying a Duplex: What You Should Know
Buying a duplex isn’t that much more complicated than buying a single-family home, but you’ll need to make a major decision before you can choose a mortgage loan: Do you want to live in the duplex or rent out both units? This guide will give you a jump-start on exploring your loan options for financing a duplex, whether you’re interested in living in one or renting it out.
What is a duplex?
A duplex is a single building divided into two separate “units” or living areas. Each unit can be rented separately, but both are usually owned by a single homeowner. Duplexes are sometimes referred to as multifamily housing, but technically, they — and any home with up to four units — are considered multiunit, single-family housing by the U.S. Census Bureau and for the purposes of a mortgage. Buildings with five or more units are considered multifamily housing or commercial property.
However, if you’re looking into buying a duplex, you may see the term “multifamily” loosely used to mean any house with multiple units.
How to buy a duplex
Buying a duplex is a great way to enter the real estate market as an investor and reap the benefits it can offer, including income generation, equity-building and wealth creation. Though the rental market has shown signs of cooling, asking rents still remain well above pre-pandemic levels.
A major factor in which mortgage program you’ll qualify for is whether you want to live in the duplex and rent out the other half or rent both units.
How to buy a duplex with owner-occupied financing
Many savvy homeowners have found living in a duplex while also renting out a unit — known as house hacking — can drastically reduce their housing expenses. If the rental income can cover your mortgage payments, you’ll essentially be living in your duplex for free and building home equity at the same time.
Owner-occupied financing offers the best loan terms on a duplex but usually requires that you live in the property for at least a year. If you’re able and willing to move, sharing a wall with your tenants can be an attractive option — especially for first-time owners who may want to take a more hands-on approach to property management.
Here are some of the steps to buying a duplex with owner-occupied financing:
1. Assess your finances
Review your debts, income and assets to get a clearer picture of the mortgage payment you can afford. You’ll also want to check your credit score, as it’ll impact your loan options.
2. Find a property you’re interested in
You can search and compare duplexes in your area using online real estate marketplaces like Zillow. A real estate agent can also help you find properties.
3. Apply for a loan
Living in the duplex allows you to qualify for loans backed by the Federal Housing Administration (FHA) and the U.S. Department of Veterans Affairs (VA). These loans help make real estate investing more accessible by catering to those who may need looser qualification requirements and lower down payments to enter the market.
How to buy a duplex with investment property financing
1. Save up for a down payment
Because you won’t qualify for government-backed loan programs, you’ll have to come up with a higher down payment — usually 25% at minimum for conventional loans — and pay higher interest rates.
2. Hire a real estate agent
A real estate agent can help you find a duplex in your area. They can also help you negotiate your contract terms and navigate the closing process.
3. Provide documents to your lender
You should expect to face additional scrutiny from the lender. Be prepared to show proof of your experience managing rental properties. In addition, you’ll also need to show that you have enough cash on hand to cover up to six months’ worth of mortgage payments, in case you hit any roadblocks with finding or keeping renters.
4. Find renters
Investment property financing doesn’t require you to live in the property. If you go this route, you’ll be free to rent out both units from day one, and you can even try to purchase a duplex with tenants already in it.
Loan options for financing a duplex
| Loan program | Minimum down payment | Minimum credit score | Occupancy requirement | Cash reserves |
|---|---|---|---|---|
| Fannie Mae (Investment property) | 25% | 660 to 680 | Borrower not required to live on the property | Six months of mortgage payments |
| Freddie Mac (HomePossible®) | 5% | 700 | Borrower's primary residence | Six months of mortgage payments |
| FHA | Varies by credit score:
| Varies by down payment:
| Borrower's primary residence | One month of mortgage payments |
| VA | 0% | No minimum | Borrower's primary residence | Six months of mortgage payments |
A rule of thumb to keep in mind as you assess your options is that investment property loans will be more expensive than owner-occupied loans. For example, the interest rate on an investment loan will likely run 0.50 to 0.875 percentage points higher than an owner-occupied loan rate. This may not sound like much, but even at a median home price — around $407,000, according to the latest data from the National Association of Realtors — it could add more than $70,000 to your interest payments over a 30-year loan term.
An investment loan will also require you to have more cash reserves on hand, as lenders want assurance that you can cover mortgage payments even if you can’t find renters right away. Typically, you need cash reserves equal to six months’ worth of principal, interest, tax and insurance (PITI) payments on the new mortgage. For example, if your monthly PITI payment is $2,000, you may need at least $12,000 in your bank account to qualify for a loan.
Using future rental income to qualify
Being allowed to use future rental income to qualify for a loan is a major perk, especially for those working with a limited cash flow. It means that lenders will add a portion of your future rental income to your existing income when they qualify you for a loan.
Here’s a breakdown of how the main loan types will count your future rental income:
→ Conventional loans will calculate your future rental income and add at least 75% of that amount to your income when evaluating your loan qualification information. If the duplex hasn’t been rented recently, don’t worry — you can use estimated rental figures.
→ FHA loans will count 75% of future rental income as estimated through an appraisal or actual rental history, whichever is lower.
→ VA loans will count 75% of future rental income, but you’ll need to prove that you have experience renting properties or are otherwise likely to succeed as a landlord.
Future rental property income can make or break your ability to qualify for a loan if your debt-to-income (DTI) ratio is near the cutoff of 45% for a conventional loan. Say, for example, that you want to buy a duplex with a $2,000 monthly payment. You plan to live in one unit and rent the other for $1,300. Your lender would likely allow you to count $975 — 75% of $1,300 — toward your income when calculating your DTI ratio. Now, instead of $2,000 on the “debt” side of the ratio, you’ll only have $1,025.
Pros and cons of buying a duplex to live in
| Pros | Cons |
|---|---|
| You'll reduce your living expenses. | You're required to live in the duplex for a significant period of time, usually 12 months. |
| You can make a lower down payment. | You'll have to live in very close proximity to your renters. |
| You're more likely to qualify with a government-backed loan that has less stringent requirements than a conventional loan. | You'll pay more in insurance, since landlord insurance costs more than homeowners insurance. |
| You can borrow more if you need to. Loan limits are higher for multiunit properties than for single-family homes. | You won't make as much rental income as you could if you were renting out both units. |
| You can build home equity at a faster pace. | You may find it more of a struggle to sell a duplex compared to a single-family home. |
| You'll gain experience as a landlord and real estate investor. | You may spend more on upkeep and repairs for the rented unit than on the unit you occupy. |
| You'll reap the tax benefits of homeownership, like deducting mortgage interest from your taxable income. |
Pros and cons of buying a duplex as an investment
| Pros | Cons |
|---|---|
| You'll get the most rental income possible because you're renting out all available units. | You won't reduce your living expenses and may have to carry two mortgages if you own another home. |
| You won't have to live near your tenants. | You'll need a bigger down payment than you would for a government-backed loan. |
| Higher loan limits will allow you to buy in more expensive or desirable areas, which will likely have higher rents. | You'll face some of the most stringent qualification requirements. |
| You'll have diversified income — if one unit is vacant, you'll still have income from the other one. | You'll have to pay a higher interest rate on your loan. |
| You can easily budget and save for home repairs and improvements, thanks to a steady cash flow from both units. | You stand to lose more if the rental market takes a downturn since the duplex relies on rental income. |
Frequently asked questions
Technically, the answer to this depends on the conventions and laws that define a duplex in your area. In most cases, when a building like a duplex is built on a lot that is split down the middle of the two units, creating two separate lots owned by two different people, it becomes a townhouse or “twin home.”
It’s possible to buy a duplex with no money down — but unless you qualify for a VA loan, you may have to get creative. You could look into entering a rent-to-own deal or pooling resources with others through group investing.
The average cost to build a duplex is between $95 and $220 per square foot, according to data from Fixr. The cost to buy a duplex will vary widely depending on the location, size and housing market when you buy.
You can qualify for an FHA loan on a duplex with a 500 credit score, which is considered “very poor” by most credit bureaus. However, you’ll need to also meet the DTI and housing expense ratio requirements to qualify for a loan, which may be tough to do if you’re dealing with bad credit and struggling financially.
The conforming loan limit for a two-unit property in most of the United States is $981,500. In Alaska, Guam, the Virgin Islands and other high-cost areas, the limit is capped at $1,472,250.