duplex interior

Investing in Duplexes in Denver

A duplex is a two-for-one home. Duplexes are often side-by-side and share a wall or are on top of each other. Investors buying a duplex are acquiring two units under the same roof. Duplexes are attractive to first-time investors because they reduce the complexity and cost of ownership.

The Time to Act Is Now

Will Denver’s housing market remain scorching hot in 2021? The Denver Metro Association of Realtors Market Trends Committee expects prices to rise further in 2021 because of a severe inventory shortage. The Denver metro area remains a seller’s market across every price range of attached and detached properties, including duplexes. Low interest rates primarily drive this trend. However, this may change as the Federal Reserve decides how to fight inflation, currently affecting all aspects of the U.S. economy. Traditionally, the Fed fights inflation by increasing interest rates. Investors interested in buying a duplex need to move fast and buy a property before interest rates go up. The best course is to find a realtor who understands the Denver duplex market. 

Investing in a Duplex vs. Single-Family Home

A vacant single-family home affects an investor’s monthly return on investment much more than a vacant duplex. A duplex with two units lowers risk because the chances of both rentals being unoccupied simultaneously are unlikely. With a single-family home, the investor is 100 percent responsible for the mortgage if left vacant. On the other hand, property insurance for a duplex is typically higher than for single-family homes. The demand for single-family homes is greater than for duplexes, so selling a duplex could take longer than expected. However, duplexes produce more cash flow over time, which is appealing to investors.

Benefits of Investing in Duplexes

Buying a duplex gives investors more flexibility since they can choose to live on one side of the duplex while renting out the other, or they can choose to rent both units. Buying a duplex at the right price in a good neighborhood while renting out both units can produce a healthy monthly cash flow, which makes owning a duplex potentially very lucrative.

  1. Cash Flow: A significant benefit to buying a duplex is that the rent from one unit may pay for all or part of the mortgage. Hence, a vacancy has less impact on covering the expenses of the property.
  2. Live Cheap: One of the most appealing parts of investing in a duplex is the ability to own a home without paying a mortgage. Living in one unit and renting out the other side of the duplex can potentially cover or lower your monthly mortgage payment.
  3. Fewer Overhead Expenses: Duplexes cost less to maintain because of the shared roof, waterline, lawn irrigation system, and landscape. These shared costs enhance the cash flow of duplexes compared to their traditional, single-unit counterparts.
  4. Easier to Finance: Lenders traditionally see less risk in lending to duplex investors, mainly if a borrower lives in one of the units. A single vacancy presents less risk to the lender, leading to better loan terms.
  5. Faster Portfolio Building: The amount of time saved at the closing table for two units on one property makes it less expensive to build a portfolio faster. With more time, investors can find and acquire more assets.
  6. Ease of Leasing: Some tenants like duplexes because they are usually larger than apartments and have a “home” feel. Also, tenants only share a wall, floor, or ceiling with one other tenant, reducing noise and other hassles associated with apartment living. Some tenants like having an owner-occupant nearby in case of emergency repairs or urgent issues.

The Cons of Buying a Duplex

Just like any investment, buying a duplex comes with an inherent degree of risk. Below are several of the drawbacks to investing in duplexes.

  1. More Expensive: Not surprisingly, a duplex is more expensive than a comparable single-family residence. However, getting two dwellings in one transaction usually makes them quite affordable over the long term.
  2. Risk: Rental income is not guaranteed, and there is always the chance that both sides are unoccupied for one to three weeks per year. Duplex investors should be prepared to pay the entire mortgage for up to three months. Investors should mitigate the risk by buying a duplex in a good neighborhood with favorable demographics. Also, they should have the property thoroughly inspected before purchase to avoid significant future expenses.
  3. Close Proximity to Tenants: Owner-occupants should pick the right tenant to become their joint wall neighbor. Investors interested in earning a passive income should avoid sharing a duplex with their renters because they may find themselves “working” more than they would like. Duplex buyers easily annoyed by noise or having tenants constantly knock on their door with complaints should not owner-occupy.

What to Look For When Buying a Duplex

Below is a list of things investors should consider when buying a duplex.

  1. A Good Neighborhood: Like most real estate investments, the duplex location attributes a lot to its success. A new investor not familiar with Denver’s neighborhoods should hire a competent real estate company to find a property that fits their needs. Great neighborhood amenities such as restaurants, shops, and parks give a duplex a competitive advantage over other properties located in less desirable locations.
  2. Comparable Rents: Comparable analyses give duplex investors an idea of what rents they can expect each month from their investment. Investing in duplexes can prove lucrative if the cash flow warrants the acquisition cost. Investors need to do their due diligence before they consider purchasing the property.
  3. Acceptable Property Taxes: A rookie mistake is to forget to add taxes in their cash flow analysis. Investors need to determine how much they should expect to spend in property taxes to determine if the duplex purchase is worth it.
  4. Good School District: An excellent school district is a big plus and attracts better tenants.
  5. Promising Job Market: A healthy job market means more potential tenants. People with more income are attracted to properties in better neighborhoods close to desirable amenities.
  6. Future Developments: A sound duplex investment strategy should consider what a neighborhood might look like several years down the road. Investing in an up-and-coming neighborhood awards investors who make that bet, but this strategy comes with a higher risk.

What to Avoid When Investing in Duplexes

Investors interested in duplex investment need to do the due diligence themselves or sign a buyer’s agreement with a knowledgeable and reputable real estate broker. Below is a list of things investors need to avoid when buying a duplex:

  1. Ignoring the Market and Neighborhood Demographics: Ignoring comparable real estate transactions and neighborhood demographics can be disastrous. Investors investing in an area in which they know nothing will probably end up regretting it.
  2. Relying on Appreciation: Appreciation is a secondary benefit that comes when the investor exits the property. Investors should focus on the property’s ability to generate enough cash to cover the mortgage and maintain the property with enough extra savings for emergencies. Investors should keep enough cash reserves to cover anything that might go wrong. That way, a setback will not completely ruin what was once a great investment opportunity. Appreciation should not focus on the investment decision; instead, it should be on location and cash flow.

Duplex owners, if you are looking for a professional property management company, please consider DenCO. DenCO manages over 150 rentals in the DU, Washington Park, and other neighborhoods in the Denver area and has been in business since 1990. Call us at 303-722-9688.