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Ask Money

Buy a duplex

Chris Farrell Jun 17, 2010

Question: I am an avid listener! LOVE the show. My husband and I have been contemplating buying our rental. The landlord wants to sell, is willing to take a loss on cost, plus it’s a duplex so we would have some portion of the mortgage paid. However, we have no down payment to put up towards buying. What kind of advice is there? We are first time home buyers, have 2 kids, steady jobs, good credit, no credit card debt, own two vehicles. We love the property and know it will only increase in value b/c of the location. Any advice is welcomed. THANKS!! Jennifer, Carmel, IN

Answer: After reading your question my immediate reaction and concern is do you have any savings?

Clearly, you’re frugal and that’s wonderful. But will you have a margin of financial safety to fall back on if this investment doesn’t work out? What if some major repair bills come due in a couple of years? What if it takes you a few tries to find a good tenant? Savings,a financial cushion, is critical at all times but especially in this economy.

To be sure, a duplex can be a wonderful investment, depending on purchase price, the quality of tenants, the rent you can charge, and the cost of upkeep. When you own a duplex or any apartment building you’re no longer a homeowner. You’re a small business owner. You’ll need to analyze this investment with an eye toward rental cash flow, the cost of maintenance and repairs, the cost of insurance, the tax benefits and liabilities, and other fundamentals of the business.

The bottom line: Is it a good business opportunity with a positive cash flow even if it takes years for the value of the duplex to appreciate?

I know I am asking question after question, but the risks of an investment like this without a cash cushion worries me. These are the kind of risk and reward questions I would recommend you and your husband working through.

I’ve also written a number of posts on being a landlord, such as this one.

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