How Much Does It Cost to Buy A Duplex – House Hacking A Duplex

Investing in real estate, especially a multifamily unit or duplex, is a huge deal. It’s a decision with hundreds of thousand of dollars on the line and many unforseen risks.

It’s a decision that should take time and careful evaluation. In an ideal world, you will have a mentor that has already been through the process many times over but that isn’t always the case. This is the third property that I have purchased but it is the first duplex and to say I was nervous is an understatement.

Can an investment property like a duplex help build your long-term wealth? Absolutely.

Can it provide you cash flow every single month? No doubt.

Is the analysis similar to any other sort of investment property? For the most part yes.

No matter, purchasing a property for almost $300,000 is nothing to brush off.

This article is an extension of a series of pieces of content I’ve done on our recent duplex purchase. Yes, this was a joint project between my girlfriend and I. One that we both believe we will reap the rewards from for years to come. To get you brought up to speed or learn more, make sure you check out these other articles after you have finished reading here:

The focus today is specifically on the numbers. You want to know how much it cost, how much we’re getting paid and everything in between. I’m going to share every last digit as well as the evaluation process we went through when purchasing our first duplex.

The Upfront Costs

Let’s not waste any time and get into it. If you watched one of my most recent YouTube videos, Why I’ve Struggled To Put Out Content + Duplex House Tour, then you’ll know we purchased this property for $290,000. Instead of going through every cost of this property I’m just going to give you some highlights:

Purchase Price: $290,000
Down Payment: $43,500 (required 15% down for duplexes)
Interest Rate: 2.875% on 30 Year Fixed
Monthly Principal & Interest: $1,022
Total Monthly Mortgage: $1,739.55
Monthly Rent (1/2*): $1,350

For the most part, that’s all the info you need to get a pretty good idea of what this looked like for us. Sure there are other small fees in the closing costs and the details but that is going to vary from loan to loan. This high-level information is the meat of it.

You’ll notice that the last item, Monthly Rent, is only for 1/2 of the property. That is because we are house hacking the property. House hacking a duplex is when you live in one side of the property and rent out the other. Your hope is that the tenant can cover your monthly mortgage payment.

In our case, they don’t quite match up. The shortfall is $390. I like to think of it like we are paying $390 a month to rent out a side of a duplex to ourselves. That’s pretty cheap rent and much less than what we had been paying previously.

To get a better idea of the property without me just giving you the address (sorry, not that bold), here are some other figures:

Built in 2017
Each side is 4 bed, 3 bath
Each side is 2200 square feet
Finished basements
Two car garage

I know those are just the specs, but it gives you a good idea of what we’re working with. Like always if you have any questions you can reach out to me via the Contact Us tab. Now, let’s move on to how we evaluated this property to see if it was right for us to invest in.

Economically Evaluating Our Property

A month ago I wrote a post called Investing In Real Estate When You’re Young – 3 Formulas To Know. In that post, I go over three formulas you need to look at and use when evaluating any rental property.

I could go into depth on every number but I think most of you reading this would get bored. So if you want to learn more about the ratio we are going to talk about below, then go click on that article. For now, we are going to plug our numbers in and see how we did in regard to the benchmarks we are aiming for.

To review these formulas I will end each section with the formula used to make the calculation.

*The numbers below are calculated on the assumption that we are renting out both sides of the property. Obviously this isn’t the case right now as we are living in one but you should evaluate your property as if it is fully rented out.

Capitalization Rate

First up is the capitalization rate or cap rate for short. The cap rate you are aiming for is going to vary widely on where you are located but personally I like using 9%. Some may argue that this is high, others low, but that is what I try to hit.

For this property we weren’t quite there with a cap rate of just under 8%.

In my fancy spreadsheet tool I have calculated that our first full year NOI will be about $23,500 and our current market value based off appraisal is $300,000. Take NOI divided by current market value and you get 7.83%.

We bought our first duplex and we are going to house hack it. Learn how we are going to do this with a duplex and the numbers behind it.

Cash-on-Cash Return

Next is cash-on-cash return, at a minimum I want to see a return of 15%. Anything less than that and I honestly believe you are leaving money on the table and a better deal is out there.

For this property our cash-on-cash return was 25.69%.

Our annual before-tax cash flow comes out to be $11,174 and we invested $43,500 which was all in our down payment. As part of our sales agreement, the seller had to cover all of our closing costs. This saved us almost $7,000! By taking BTCF and dividing it by our total cash invested you get the 25.69%.

Monthly Rent Ratio

The last ratio I really like to focus on is the monthly rent ratio. This is something called the 1% rule because that is what you should shoot for with this formula. The other reason I love this formula is that it takes 3 seconds to calculate in your head and give you a good idea if a property may be right for you or if you should look at some other options.

For this property, our rent ratio is .97%

Just a little shy of the 1% we would like to get but I honestly think the rent rate is low for this area. Being newly built properties, the past owner (who was the builder) was just trying to get units filled and cash flowing. I don’t blame him but I believe the rent is 5-10% under market value for a property of this condition.

Outside the Numbers

This duplex didn’t quite hit all of our number targets but there were other things we took into consideration outside the numbers that helped seal the deal.

First and foremost we both believe that the area that the property is in will only appreciate. It’s essentially in the suburbs and surrounded by good schools and even a couple of brand new ones. Along with that it is close to major highways and one of the largest employers in town.

On a more selfish note, this property is located in a part of town we want to live in. It’s close to our friends, family, gym, grocery store, work, and so on. In addition, we weren’t looking for a project home/duplex. More than her I wanted a fresh slate we could move into to make our own.

These are all things that helped us decide this was the right move for us.

The Bottom Line

Purchasing a duplex or any investment property for that matter is stressful. Signing your line on a document stating you are responsible for $250,000 worth of debt is crazy to even think about. This is where you need to understand the difference between good debt and bad debt.

We are using good debt to buy an asset that is going to support our lifestyle for many years to come. Does the large down payment make me feel like I’m broke? Yes, but I think creating scarcity in your mind in regards to your finances is an extremely effective tool to build your wealth.

If you are looking to invest in a duplex, or any type of real estate for that matter then do what you can to find a mentor. Having someone who has been there before can save you from potentially doing a bad deal. They know what to ask and what to look for.

If you are like me and struggle to find anyone then do as much analysis and learning as you can. Reading posts like this and others from people who have invested in real estate will save you from many headaches down the road. I went ahead a linked some below.

Happy investing.

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