Co-own a duplex!?

Options, lots of options. Yes, a duplex is typically more expensive than a single-family property if you compare absolute price, BUT in reality a duplex, is often much more affordable and offers a lot of advantages. I’ve personally purchase two multi-family properties in San Francisco and Oakland and I continue to give advice to friends and family about the benefit of buying a duplex. For the purpose of this blog, a duplex is any home with more than two units, such as a multi-family building and includes townhouses and condominiums. I’ll be using duplex and multi-family interchangeably throughout this post.

First, let’s start with the numbers

Cost per square foot - while the total cost of a single family home maybe cheaper than a multi-family, cost per square foot is often 10-20% less.  As an example the cost per square foot of our most recent purchase even after renovation and high end finishes was $850/ sq ft - while the median in San Francisco is $1,069 per square foot - that’s a $20.49% discount, which in this case represented nearly $1M in savings!

Offsetting your cost of living through rental income - Let’s take this very same property where in a very “real world” scenario we have one tenant that was already there with rent control and low rent, and one new tenant that is paying market prices.  So how does this pan out even without optimal rent.

My current cobuy property in SF:

Unit #1 - $2,700

Unit #2 - $7,300

Unit #3 - We live in, but would normally be rented for $8,000

Total revenue - $18,000

Now let’s take our monthly costs:

Mortgage interest - $8,800

Property Tax - $2,100

Property Management - $350 ($175 x 2 units)

Insurance - $520

Maintenance - $530

Total costs - $12,300

Gross income

Revenue - $18,000

Costs - $12,300

Total income - $6,700

Fully rented this property nets us - $6,700 in gross income some if not all which can be offset by costs associated with renovating the units (not your primary but the rentals) and depreciation.

Now because we’re living in the unit we actually lose $2,300, but even assuming we rented another place for $7,000 (less than what we could rent it) - we take home $4,700 and this is without even taking the appreciation of the real estate into consideration.

Live / rent options

If you group is debating how to make revenue from a co-buy property or one partner in the group wants to live in a unit, a duplex opens up more arrangements and more flexibility when it comes to filling units. Choose from Airbnb, traditional leasing, living, and flex space for vacations. All of these options are available in multiple configurations with triplexes. I personally live in one of the units in my San Francisco triplex with my family, and lease the other two units to tenants with my co-buy group. Our group gets the benefits of earning revenue on two of the units as well as the peace of mind knowing I am paying rent on the third unit while keeping a close eye on the property.

Hypothetical option 1:

Live in 1 unit + lease 1 units

Hypothetical option 2:

Airbnb 1 units + lease 1 unit

Favorable Loans

We know that more units means more square footage which means a higher price tag, but your might be surprised by more favorable loan terms and rates offered for a duplex. Why? More units also means more potential revenue which mitigates some risk in the eyes of a bank. If an unexpected event happens, extra income from multiple units provides a safety net that is not diversified away in a single family home.

Spread out costs

Chances are your property is going to need some renovations and maintenance when you purchase it. If you are looking to upgrade appliances or remodel costs can add up quickly especially with contractor labor. When you buy a duplex you are able to spread the costs of your contractor labor over multiple units and negotiate deals on bulk materials as well. The cost per unit for maintenance, remodel, and fixes is significantly less when your group purchases a multi-family home.

Furthermore there can be some key tax advantages that you wouldn’t normally be able to take such as depreciation and major building upgrades that are written off of your rental income lowering the taxes on that income.

Condo Conversion Opportunities for Co-bought Duplexes

While multi-family buildings benefit from all of the above, in cities like San Francisco there are unique opportunities for those who co-buy duplexes.  If two parties co-buy a duplex and make it their primary residence for 2 years they can then apply to condo convert. While many other multi-family buildings no longer have that option (like my triplex) the city is favorable in time and money to allowing duplex’s to condo convert.

For all these reasons look at making your first purchase a duplex and then move on to your single family home!

Nestment, Inc. does not guarantee and is in no way responsible for the accuracy of information provided in this blog post. All information is provided “AS IS” and with all faults. Data presented here may not reflect all real estate activity in the market.  While the information on this site is about legal and tax issues, it is not intended as legal or tax advice or as a substitute for the particularized advice of your own attorney and tax professional.