You can turn a nice profit by making investments in either duplexes or single-family houses. Many real estate investors have made a fortune using both methods of wealth creation. But real estate investing is all about cash flow, and if you are buying real estate for investment purposes, a single-family house will limit your income to one renter, while a duplex allows you the opportunity to collect on two. There is money to be made investing in single-family houses located in solid, appreciating neighborhoods where there is high demand for housing. But investing in duplexes offers more advantages.
Subsidized Living Expenses
With a duplex, you can potentially live in one unit and rent the other one to generate income for your living expenses. If you can come up with a large-enough down payment and get a low-enough interest rate, the rent you collect from the tenant could cover all or at least a good chunk of your living expenses. If you invest in a single-family home, you will need to collect enough rent to cover the mortgage payments and cover the expenses related to that house. Ideally you will have a profit each month from the house, but it probably will not be enough to subsidize your living expenses to the extent a duplex would.
Cash flow is king in real estate investing. If your tenant moves out of a single-family home, you'll lose 100 percent of your cash flow and will be stuck with the full cost for the upkeep of that home until you find a new renter. Assuming that you are renting both units of a duplex, if one tenant moves out, you still have cash flow from the other unit to help cover the bills until another renter moves in. A duplex offers more sources of income and therefore can reduce the risk of the investment.
Single-family home values are based on the sales prices of similar single-family homes in the same neighborhood, which is great when prices are rising and not so great during economic downturns. Duplexes are valued on the cash flow the property generates. It doesn't matter how much rent you charge for a single-family home, buyers will determine its value based on what nearby single-family homes are selling for. Duplex values are not as affected by falling home prices in a particular neighborhood as long as rents stay the same. You can actually increase the value of a duplex by raising the rents, because another investor will be willing to pay more for the higher cash flow.
It could actually take less income to qualify for a mortgage to invest in a duplex than you would need for a single-family house. Banks will give you credit for 75 percent of the current cash flow on a duplex in determining your ability to repay the loan. If the duplex you intend to invest in currently has two tenants paying $500 each -- $1,000 a month-- the bank will give you credit for 75 percent of the cash flow -- $750 -- as income. Assuming you have saved enough of a down payment, have good credit and a job, you would have little problem getting loan approval. Banks are not so flexible with single-family home investments. You would need to show the lender you could come up with $600 a month even if there is someone currently living there paying $800.
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