The Definition of a Duplex Property in Real Estate

Duplex neighbors meeting new neighbor with a gift basket of fruit on the front porch of the structure.
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A duplex in real estate refers typically to a structure used for residential purposes and consisting of two living units with a common wall.

Real estate agents may list these properties for sale as either "residential," "multi-family" or "commercial," as they are purchased for diverse reasons. A family may buy one and rent out one side, which will be financed as a residential unit. An investor may buy one to rent out both units, thus financing it as a commercial or residential investment property.

In the image, we see a conventional layout for a duplex, with two sides mirror imaged. In this case, the garages are in the middle, but there are many configurations. Another is an over/under with adjacent garages but two-story homes. It doesn't matter, as long as there are two homes joined by some kind of common wall structure. There are different ways to invest in duplexes, depending on if you want to use one part of it as your residence or not. 

Live in One and Rent Out the Other

This is popular with new investors and those who want to help to pay for their residence with rent from the other half of the duplex. The benefit of doing it this way, other than a place to live, is that you can generally finance it with a residential mortgage because you use it as a residence. 

As with a single-family residence, it is unlikely that moving out and renting out the other side will get your mortgage called in for full payment, but it is usually a part of the agreement that this can happen. Many have found that they can offset a significant portion of their mortgage payment with the rental income. Above that, there are some very lovely tax advantages and deductions for the part used as a rental. This includes depreciation, which doesn't involve cash out but does save you on income taxes.

How does that depreciation thing work? Well, consult an accountant, but you should be able to depreciate the structure (land value deducted) over a 27.5 year period. So, if you have an investment structure with a cost basis for the structure of $200,000, you would divide that by 27.5 to get an annual depreciation deduction of $7273. This amount is not money out of your pocket or money you spent, but it directly offsets income from the property as a deduction. This is a great tax break and contributor to after-tax cash flow.

Duplexes as a Stand-Alone Investment

Though they are not apartments, there is some economy of scale in buying and renting out duplexes. Two units in one location with a common roof does result in savings in maintenance and management costs. If you buy them this way, the mortgage situation usually changes. If you're not going to be living on one side, it is going to be financed differently.

There can be other cost-side advantages. Insurance is usually less expensive, again because of the common wall and roof. Taxes can be less than two equal size single-family homes, as the value is usually less per unit for tax valuation. There is something to be said for two units in one location as an investment when it comes to monitoring your assets with periodic visits.

There are often purchase opportunities for duplexes not common for other rental property types. Those who bought to live in one side may have to move for personal reasons, and an investor can pick up a duplex at a reasonable price with a tenant already installed in one side.

There can also be an advantage if you want to sell the property. Sometimes one of the tenants will have an interest in buying, especially when the income and tax advantages are explained to them. If they get along with the other tenant, this increases the chances they may want to buy.

Everything considered the duplex property is a great transition into multi-family investing from single-family homes. It is a good training ground for larger multi-family properties as well.