If you do it right, this means that — through their monthly rent payment — your tenant pays your mortgage and bills, while you live rent-free and simultaneously build up equity. It’s a win-win.
Initial Steps: Research
Before jumping in, do your research. Find a good neighborhood with rents high enough to support your purchase price. Search for homes in safe areas where homes have consistently increased in value.
Since you’ll also be living in the duplex yourself, this adds another element to your search. Depending on your loan, you’ll probably be living here for at least a year so only consider homes you’d like to actually live in.
You will also need to learn a few things about being a landlord. Plenty of resources, podcasts, and forums exist to help you navigate this.
To start with, you’ll want to read up on how to market to potential tenants in your area, come up with a standard lease, and possibly start an LLC for your business.
Or, if there’s room in your budget, you can hire a local property management company to handle all of this for you. Most charge in the ballpark of 10% of gross rents for long-term renters.
Buying a Duplex
Purchasing a duplex is one of the easiest and least risky ways to enter real estate investing. “House hacking” is a widely-used strategy in which you purchase a duplex and live in one side while renting out the other.
Not only do you have the benefit of living rent-free and building equity, you pay one property tax bill, one water bill and maintain just one property.
Unlike single-family rentals, you’ll also have income from two tenants, instead of just one, when you decide to move out.
Perhaps the biggest benefit, though, is that you may qualify for an FHA loan with a down payment as low as 3.5% — much more feasible than the usual 20% to 25% needed for an investment property loan.
Multi-family properties aren’t eligible for these low-down-payment FHA loans, but duplexes are — as long as it also serves as your primary residence for at least a full year.
So, work with a local, trusted real estate agent with investment experience to find a duplex in a desirable area for renters.
Regardless of the listing price, consider what the property can bring in as income.
By comparing this income estimate to potential expenses, you’ll have a pretty good idea of your monthly cash flow. In this case, it likely won’t be much — instead, you’ll be living rent-free.
The 1% rule
A good rule when analyzing a duplex is the 1% rule — strive for a property in which you can feasibly get 1% of the purchase price in monthly rent income. For example, if you’re looking to purchase a duplex for $200,000, you want it to be able to pull in at least $2,000 per month in gross rent income based on the market.
You won’t actually collect this amount just yet since you won’t be paying any rent for your side. But, this ensures it will be a sustainable rental property once you decide to move on and rent out both units.
Move out in a year if you wish and into another duplex to house hack or find a single-family home to move into and enjoy the start of your investment career and the tax benefits and income that come with it.
Crowdfunding isn’t just for start-up business ventures or new inventions. If you like the idea of growing your portfolio through investing in real estate, but don’t want to actually manage it, crowdfunding may be ideal.
Through crowdfunding, a group of people pool their money to invest or lend to investment property owners in need of capital. So, in theory, with minimal time investment and financial risk, you could profit.
While crowdfunding allows you to invest small amounts of money in real estate, it can also be riskier since you’re trusting someone else to manage the property and don’t have much — or any — say in how they do so.
For the best outcome, research the company thoroughly — learn how much you need to invest to turn a profit, how long the business has been operating, fees they may charge along the way, and any reviews you can find. Fundrise is one of the more popular real estate crowdfunders and you can invest as little as $500.
Ben Mizes is the co-Founder and CEO of Clever Real Estate, a free online service that connects home buyers and sellers with real estate agents. Ben is also an active real estate investor with 22 units in St. Louis and a licensed real estate agent in the State of Missouri.