First time home buyer debating if purchasing a single family house or duplex makes more sense. What are the pros and cons?

Asked by Mike O, Austin, TX Tue Dec 22, 2009

I am planning live in the house/duplex for a while. Also everyone says “Location, Location, Location”, what does that really means? Currently I am living in North Austin zip code 78729 and I like that area. However, I prefer to buy in a zip code that tends to hold up its value relative to other areas in Austin through good or bad time. Any inputs will be greatly appreciated! ~Mike O.

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14
1st Zero-Emi…, , Austin, TX
Tue Dec 22, 2009
oh, and if you are considering a Duplex, the tax credit will be based on your side of the home, opposed to the entire Duplex. Basically, as long as you buy a Duplex for at least $160,000, you can still get your full $8,000.

For example, you buy a Duplex with 2/1 on each side and the entire Duplex costs you $140,000, only half of that (the side you live in) will be considered "home" therefor giving you $70,000 towards the tax credit.

The tax credit is for 10% of your "home" purchase "up to" $8,000 in credit, therefor this would allow you to receive only $7,000, because 10% of your $70,000 home is.... $7K.

Since you can't really get a decent Duplex for under $160,000 (respectively of course), then you should be safe on the tax credit.

Have you spoke to a mortgage lender to get an idea of your comfortable price range?
If not, we can lay out a simple idea here...
What range of cash do you have to comfortably put down as a Down payment, if any at all?
and
How much are you currently spending per month on rent?
and
How much are you comfortable with spending per month on home ownership?
2 votes
1st Zero-Emi…, , Austin, TX
Tue Dec 22, 2009
Mike,

Congratulations on your decision to purchase a home! You are going to be one of the few in this nation that gets to tell a great story in the future about how you were given $8,000 to purchase a home with less than a 5% interest rate. It''s going to b e one of those stories in the future history books and you are lucky enough to qualify, so congrats, and I hope you are excited about that opportunity.

Home prices will not be skyrocketing up, but interest rates are another story. You simply do not know what they will do, so the faster you are able to complete your purchase, the safer you are in locking in such a low interest rate. Do not fear so much "buying the wrong home", rather "missing out on such a low interest rate".

I say that because when the rates climb, they climb fast, and it will change the game entirely, then you may find yourself rushing to buy a home, and that's how you get caught up in the wrong deal. So, if you find a home you like for multiple reasons, STRIKE... while the iron is hot!

Now, First thing's first....

Have you hired a great Realtor? And, I don't mean a great friend who is a Realtor , and I don't mean a Realtor that promises to give you money if you do business with them, or even a Realtor that simply has a bunch of "years of experience" stacked up. This is a new world order out there, so find out what makes your Realtor so great, and understand how that will play into "YOU" having a successful First Time Home Buying experience.

Whatever you do, do not start this alone. Do not rely on Trulia to carry you through successfully. It will cost you greatly in misunderstood, indirect advice when it comes to the real home, real location, real neighborhood, the real condition, and the real deal.

After hiring a truly great real estate Agent (Realtor), then go through a discovery phase with that Agent so all your answers can be clearly defined. This is highly effective and much needed for your success.

As far as "Duplex or House" goes, it sounds like you have an itch for an investment, in addition to a place to call home. Could be a good thing, or it could be your first nightmare. Some additional questions that you would never think to ask yourself, need to be answered to better uncover the direction that will satisfy you the most...

There is so much to say about both Houses and Duplexes that will greatly effect your decision.
One little secret for you to walk away with here is, if you desire to live and rent a Duplex, try to find one that is not in a "Duplex Haven" or "Duplex Row". Find a Duplex that was a "one-off" build in a neighborhood full of homes. This will lend you more "pride of ownership" and neighborhood enjoyment, plus it tends to lend more on the resale factor. Certainly do not count on finding many of those available, however, just know that they are higher demand in the Duplex world.

To gage your vision level; how long have you lived in Austin and how familiar are you with "pocket" areas?

ShawnMon
2 votes
1st Zero-Emi…, , Austin, TX
Wed Dec 23, 2009
Mike,
Save yourself the heartache and confusion brother! Get with a great Realtor to help you start, carry out, and finish this the right way.... (I know, plug plug plug, but it's true)

Your Realtor will recommend a Mortgage Lender to get with if you have not jumped on board with one yet, so you can clearly define what you qualify for, what your are comfortable with paying per month, what each sales price means in "dollars per month", and how much you'll need to put down based on the program that best suites your needs.

You may have plenty of cash sitting in a bank that would be better off sitting in your real estte equity and in return will drive down your monthly note starting with avoiding PMI insurance.

On the other hand, you may not have any money at all in the bank and need to look at a couple options for getting into a home with zero dolloars in your account.

And of course, there is everything in between and beyond.

Outside of that, doing your own research will only cloud your judgement on real estate as you start to put together your own conclusions that end up dead wrong. It happens every single day out there.

And, if you have any desires to believe you will be able to "negotiate with a Seller since you do not have a Realtor" and save that 3%, well.... trust me when I say.... Those Sellers and those Realtors love you for that, because they are able to take advantage of your loss. That Seller still pays the listing Realtor that other 3%.... and tells you what they should in order to close the sale.

Pick up the phone or email me, Mike.
It's an easy little process to get started and there are a few steps that are going to save you heartache and headache!

Shawn
512-663-4686
1 vote
JOSEPH E JAR…, Agent, Austin, TX
Tue Dec 22, 2009
Mike, you've gotten a lot of good info. already. The main piece of advice I would offer is that owning a duplex/rental property does come with more work and challenges. For example, could you pay the entire mortgage if a tenent or tenants got behind on rent or moved out and it took a while to get a new tenant? My uncle did this for many years and finally got out for these reasons, and the fact that most laws favor the tenent, not the landlord/owner. Proceed with caution! Also, SFR's (single family residences) do usually appreciate more quickly and qualify for better interest rates than do investment properties, for the most part. If you aren't working w/ a REALTOR yet, I would recommend using one (it would be of no cost to you typically as a buyer) and would be happy to guide you through the process myself. I have a good amount of experience and a team of lenders, inspectors, advisors, etc. that can help us as well. You can click on my name to the right to see my credentials, client testimonials, etc. Let me know if I can be of assistance. Joe Jarusinsky, REALTOR/Master Instructor, Keller Williams Realty.
1 vote
Brandon Gard…, Agent, Austin, TX
Tue Dec 22, 2009
Mike,

In Austin I believe there are only a few scenarios a duplex makes sense and the following are a few examples: You need a tenant to share in the payment to make a monthly payment comfortable when a condominium is not suitable for your lifestyle. You have parents that need to be near for health reasons and you all cannot afford separate residences near one another. Last, I've had buyers who will pick up a duplex in a predominantly single family area - usually in an older part of town and with single family on both sides of the duplex- where the idea is to hold the land as an investment using the dual rents of the duplex to pay for it because we believe the dirt in that area is appreciating at a minimum of say 15% annually across period of time. In this example, we would be looking for a buyer who wants to convert the duplex to single family at sale, or possibly demolish the structure and build a single family home.

The downside to duplexes, at least in Austin, is the appreciation differential when compared with single family. Duplex appreciation is for the most part tied to the rents it can bring where single family areas will go up based on other considerations that are not constrained by income production potential. I have seen duplexes appreciate at 1%-2% annually from a bust to boom cycle - say a 5 year period - where single family in the same area appreciated at an average of say 8%-10%. Even when you take into account the rental income and tax implications of both properties, were you to live in one side of the duplex, the single family comes out ahead as an investment, albeit in some cases only marginally, and was probably a more enjoyable place to live. In that same cycle, keep in mind there would have been single family areas that went up as much as 16%-18%, in which case the single family would FAR outpace the duplex in appreciation. The tough part is finding that area...which brings me to location.

The old location, location, location axiom simply means you can always change the house - from a cosmetic remodel to a demolition and re-build - but you can't change where the house is. Location is always paramount in a purchase. This is true when considering one neighborhood over another - you may be able to only afford a fixer upper in what would be considered a great location in a given city, where in an average or poor location in town you can buy a home that has everything you want. Or when considering one lot over another in a given subdivision - a home in a cul-de-sac, backing to greenbelt on a large lot may come with laminate counter tops, cheap carpet and linoleum flooring at a given price. A home offered at the same price, in the same neighborhood, but with an inferior location - say backing to a busy road where noise is a significant issue - may come remodeled with with granite counters, plush carpet and tile flooring at the wet areas.

Hope this helps and good luck!

Brandon Gardner
1 vote
Robert H. Ne…, , Austin, TX
Tue Dec 22, 2009
Mike,

Merry Christmas. I pondered the same question when I was considering my first home. I had a different answer on the hour, every hour. When you hear, "Location, Location, Location" it is a reminder to look at areas where home prices per square foot are strong, as well as looking to future development. Things change fast in Texas. It is helpful if your Broker is also investment oriented.....while the cash flow is great in regards to the Duplex vs. Single family residence: duplexes tend to appreciate slower than single family homes: creating a more cloudy picture. My favorite exercise when talking to a buyer on the fence between these two property types is the yellow pad drill: we take several areas, our trusty calculator and gaze into the future. By taking trends into account we can project potential increase vs. the benefit of monthly cash flow. This takes time, but adds a layer of clarity that is helpful. Bear in mind that the loan process for investor properties has changed significantly in the last 15 months.....however there are other property types that can be found. For example, the house that has a garage apartment: super common in core Austin. Drop me a line if you have specific questions. My company invests in Austin as well as represents buyers and sellers, we would be honored to be a resource.

Robert H. Nelson
The Associates Austin
512.517.4432
robert@highway290west.com
1 vote
Josh Kohl, , Austin, TX
Tue Dec 22, 2009
Payment, interest rate and responsibility. Typically duplexes will have a higher rate and come with the extra headache of a first time home buyer also acting as a land lord. In my opinion jumping into the land lord arena right off the bat is a bad idea. There are too many items out of the buyers control which can have a negative financial impact. From a lending stand point financing will be more beneficial for a SFR. Also I would check with a CPA in regards to the purchase of a duplex being eligible for a tax credit. The art of the deal right now which I believe trumps location, location, location is built in equity. As a lender I have seen clients get amazing deals with great built in equity.
1 vote
Paragon Prop…, Agent, Austin, TX
Tue Dec 22, 2009
Hi, Mike: As a first time homebuyer, it's great to look at all the possibilities. Part of your decision may be lifestyle related. Would you prefer to live in a house with your own "space" or are you ok with living in a duplex? When you are looking at duplex properties, you will notice that some areas are less nicely kept than others - sometimes that can be a function of most of the occupants being tenants and not caring as much about the upkeep of the property. Many people buy duplexes solely for investment and never live in them, so their "pride of ownership" may be different than yours. Having said that, there are definitely areas where there are many owner-occupied units and that may be your best bet should you decide to go that route.

One thing about buying a duplex is that you do have some income to offset your payments and many people keep their duplexes as investment property when they move up to their next home. Remember, once you have paid off that loan in the future, it can be a great source of income for future retirement, in addition to appreciating over time.

Without knowing your price point, it's hard to steer you in a direction for the best area to meet your needs/wants. If you would like to email me your criteria, I would be happy to research it more fully to send you in the right direction. It's a great time to buy - interest rates are as low as I think they will ever be. The general consensus is that rates will start creeping up once the government stops buying mortgage securities and that could be as early as this Spring.

I have a First Time Homebuyer booklet that I have put together that explains a lot of the process plus another brochure that weighs Renting versus Buying. I'd be happy to mail them to you if you forward me your contact information.

Happy Holidays!

Sue Ellett, Broker-Associate
Coldwell Banker United, Realtors
512-422-7182
suemellett@yahoo.com
1 vote
Katina Wright, Other Pro, Atlanta, GA
Tue Dec 22, 2009
Greetings Mike,
Sounds like you are definately on the right track. Most men are commitment phobic when it comes to...well, almost everything, especially a house :-)

Location, location, location means exactly what you think it means. Just like when you see a strip of retail spaces, sombody is always jockin for the corner. Here in Georgia, you could almost bet that off EVERY freeway exit there's a Waffle House. Businesses that 'fail' are typically not easy to get to or in a bad location.

Duplex is a good idea, you've got two rents under one roof. The biggest downfall to you immediately would be buying something where you would be dependant on the rents. Ex... Sarah is buying a triplex in Chicago, but the rents of the building don't cover enough of the $600,000 mortgage to make scense, but she wants it anyway.

Not a particularly smart move in my opinion from an investment point of view, but that's what she wants to do to herself (pockets). As long as the numbers work you should be ok. See if you can find yourself a good distress sale expert interested in helping you find a killer deal, not all agents are the same!

Good luck...I think you are definately on the right track,
1 vote
Robert H. Ne…, , Austin, TX
Thu Dec 24, 2009
Mike,

It looks like a lot of guidance has come forth from my peers. I see that you have more questions (and probably many more not listed here) Regarding down payments: You will need between 10 and 20 percent down. This will be driven by your credit score, income level and cash reserves. A note to the side, sometimes the seller of a income property will finance the deal, and in this case your finance costs drop significantly. I have purchased many investment properties with seller financing. The interesting thing about purchasing duplexes or other multi family properties right now, is that prices have fallen while rents are stable. Here is a trivia fact for you, nearly half of the homes in Austin are rental properties. Without a doubt you will be able to keep your duplex rented out. If you were to migrate in 3 years we can handle property management on your behalf. Interest rates are amazing right now, and if our target property qualifys the $8,000 tax credit is quite the gift from the feds.....

I am signing off for a few days: Merry Christmas and don't hesitate to send me any of your questions.

Robert H. Nelson
The Associates Austin
512.517.4432
robert@highway290west.com
0 votes
Michael Unger, , Coral Springs, FL
Wed Dec 23, 2009
You have said you are going to get with a Realtor soon. That's good. May I sugesst you get with a Realtor that is familiar with both residential and income property. Usually when one buyes residential property that purchase is driven by the heart. When it's income property, it's usually the head that takes over. Everyone knows how to buy a home they intend to live in. You walk in and your heart says "Yes". With income property there are numbers to deal with, entry costs, maintenance costs and exit costs. CAP rate desired, cash on cash and don't leave out having an accountant look at what will happen to your tax position.

Mike
S. Florida
Web Reference:  http://www.flarealtysite.com
0 votes
Betina Forem…, Agent, Austin, TX
Wed Dec 23, 2009
Dear Mike,
Something else to think about is if you choose a duplex will you be managing the rental unit or will you be paying someone else to lease the property and maintain it? A word of advice, don't buy a duplex in a neighborhood of nothing but duplexes and four-plexes, as it may not appreciate as rapidly.
The key is buy the worst house in the best neighborhood, as you can change the house you can't change the neighbors.
Cheers!
Betina Foreman, Realtor
0 votes
Kathy Vallee,…, , Oro Valley, AZ
Wed Dec 23, 2009
I do not live in Austin but as an investor I can tell you that single family residences typically appreciate better then a duplex. Another consideration is the management of a duplex will require more repairs and turn around than a SF home. Location! Stay away from busy streets and look at the turn around data for the neighborhood. Look for a Realtor that specializes in investment properties.
Good luck...it's a great business!
0 votes
Mike O, Home Buyer, Austin, TX
Wed Dec 23, 2009
First of all, thank you so much for your thoughtful answers, much appreciated! I have yet hire a realtor but will do so soon in a month or two once I do more research in house buying. It looks like there are a few great candidates here to be my realtor since the answers have been very useful. Here is a bit more about myself: I am looking to buy a duplex/single family house for no more than $220,000. Currently I am doing my own research in the North Austin area but I have no problems looking at other areas within the Austin proximity as long as it is in a safe and good neighborhood. Being a single recent college graduated, I am not really looking for a huge place. For the duplex situation, I have no problem paying the entire mortgage payment even when the tenant leaves. I am more investment driven but is open minded about what makes the most sense in my situation. I am thinking about living in the duplex/apartment for around 3 years and move on to another state (However I will keep my first property in Austin Texas and let a property manager manage). In addition to the previous questions, I heard there are great deals of help and benefits to the first time home buyer, is that true? If so, what are the benefits? What is the minimum down payment nowadays for first time buyer after the sub prime crisis? Thanks in advance for yours answers –Mike O.
0 votes
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