So, your thinking of buying a duplex, it’s a great decision as a novice or experienced investor, duplexes are a perfect play on real-estate investing.

Buying a Property is a big responsibility, unlike other investments like stocks, and gold; properties are much harder to liquidate. That puts a lot of emphasis on choosing the right property form the start. Having all the necessary tools to help you make a better decision with your duplex purchase can help prevent major mistakes.

Minor mistakes made during the initial stages of buying a duplex can cost you thousands of dollars. So, before choosing to buy residential multifamily, check out this helpful list of things to look for during your search.

1. Educate Yourself First

Owning a home and renting out a home both require different levels of education. When buying a home different factors come into place. I was taught general criteria when I was searching for my first home. The advice my friends and family gave me was to focus on Location, Location, Location.

Although this information was true, there was so much that was left out. So, my father gave me a few books to expand my investing knowledge. List of books I read as a beginner:

• Rich Dad Poor Dad; by Robert Kiyosaki
• Unfair Advantage: by Robert Kiyosaki
• ABC’s Of Realestate Investing; Ken McElroy
• Best Ever Apartment Syndication Book: by Joe Fairless

This is a small list of some of the books I’ve read to educate myself on rental properties. There are numerous resources out there to help you learn the ins and outs of property investing. Bigger pockets is another great learning tool that strickly focuses on real estate investing with over 70 million users.

The vehicle that you choose to educate yourself is irrelevant, what matters is that you start learning NOW.

2. Align The Purchase With Your Long Term Goals

Creating a long term plan and real estate strategy can help you make better purchase decisions. Where you see yourself in 10-20 years can drastically affect your purchase today. If you’re purchasing a duplex in a not so desired area by yourself, and you decide to start a family. You may start considering the option of renting or selling your property, because of the lifestyle change.

Another aspect to consider when focusing on your longterm vision is your investing strategy:

• Buying Apartments
• Turn-key properties
• Buying residential multi-family
• House flipping
• Whole-sailing

Within this post, we’re discussing the strategy of buying and renting multi-family buildings. But there is a vast amount of real estate investing strategies to choose from.

So, before investing in real estate, make sure you have a long term plan written down, as well as a niche strategy of your choice. Look through some of the investing strategies to determine which one best suits your lifestyle, and “Go For It”.

3. Don’t Limit Yourself To Only Two Units

“You have to set goals that are almost out of reach. If you set a goal that is attainable without much work or thought, you are stuck with something below your talent and potential”

By Steve Garvey

With an FHA loan(first time home buyer program), you can buy up to 4 units. Often times we set our goals on what we think is achievable; there’s nothing wrong with starting out with two units. But, if it’s possible to purchase 4 units in a great neighborhood then “GO FOR IT”.

Once the first property is acquired, it will be a race to scale-up and increases your property portfolio.

“Yes I’m grateful for the units I purchased at 22 years old, yes they’ve appreciated and have a lot of equity, but there are those times when I regret purchasing only two units for my first deal”.

When you’re approved for the purchase of a duplex, the loan amount tends to be slightly higher. The income from the other units offsets your monthly mortgage payment. Therefore, by increasing the number of units the loan amount you’ve been approved for will increase as well.

This poses a huge benefit when looking for a duplex property if you’re in the process of being pre-approved. It doesn’t hurt to inquire into how much you’d be approved for if you were to purchase a 3 or even a 4 unit property.

4. Analyze The Property

This part of the process is by far one of the most important steps when purchasing a rental property. The money is made on the front end, during the initial analysis stage not on the back end after the property is sold. I’m sure you’ve heard that famous adage “: Buy low sell high” this applies to real estate, stocks, businesses and so on.

There are multiple factors that go into place when purchasing a property to help you determine if the property will cash-flow from day one. Let’s go over a quick break down of how to analyze a property on the go.

The Five steps to evaluating a property

1. Verify Property Income
2. Verify expenses
3. Determine net operating income
4. Find the capitalization rate
5. Calculate the loan to payment and your profit or cash on cash

Verify property income

Real estate agents often will give a proforma, which is an estimate of what the rents for the property could be. This information could be false projections the seller uses to inflate the price of the property, don’t use it for your projections. Instead, you should ask for a rent roll or a T-12(trailing 12) which is a break down of the income and expenses for the previous year.

Verify Expenses

This information can also be found on T-12, a lot of mom and pop sellers managing their personal properties may not have adequate paperwork. If you find yourself in this situation the seller can provide you with incomes from each unit and the expenses will have to an estimate. Expenses are to included:

• Repairs and Maintenance
• Utilities: trash,water,gas,
• Real estate taxes
• Insurance
• Replacement Reserve
• Landscaping
• Property management
• Property taxes
• Mortgage
• HOA fees(If applicable)

Determine net operating income

Net operating income is an accounting term used to analyze the profitability of income-producing real estate. The formula is (Income minus expenses).

Find your capitalization rate

Remember when you found the NOI, you’ll be needing that number here, the cap rate is (NOI divided by the Purchase price).

Calculate the cash on cash return

This formula is the bread and butter of property investing when using the cash flow strategy “Cash on Cash”. After you’ve calculated the NOI and subtracted the mortgage use this formula (Profit divided by down payment). You’ll be left with the annual return of your investment. According to fortune builders.com, good cash on cash return is 8-12%.

This method is quick and can be done on a napkin, but if you want a more thorough in-depth approach Bigger pockets offer several different calculators to choose from.

5. Mortgage Loans

1.FHA Loans

These types of loans are a powerful tool to use when starting your real estate journey. Federal-backed loans require a low downpayment of 3.5%, and you don’t even need a high credit score to qualify.

However, there are some additional costs that you may accrue, such as PMI (principal mortgage insurance). The home also must be occupied for a minimum of two years before you decide to rent it out, and will not be counted as part of your net worth.

This loan type was designed for low to moderate-income earners and gives people the chance to own a home. But if you implement the right strategy you can accumulate a portfolio of properties 1-4 units rather quickly.

2. Conventional Loans

Conventional loans are another common loan type that home-owners use to purchase rental property and homes over $500k. Since the loans aren’t federally backed, the guidelines are usually more strict: higher down payments of 20% and a minimum credit score of 680 is required.

3. VA Loans

VA loans are another great tool, but they only apply to you if you’ve served in the military. If you’ve served our country and do meet that requirement, then NO MONEY IS REQUIRED as a down payment, and PMI isn’t applied to your loan. Awesome option to use when purchasing a home if you qualify.

4. FHA 203(B) Loans

This type of loan is very popular amongst borrowers with a modest income. It gives borrowers the ability to buy a fixer-upper property with 3.5% and add the repair cost onto the loan amount.

6. Be Careful With Natural Disaster Zones

There are several zoning areas that cause insurance on your property to be higher than normal. If your property is located in a Fire, or Flood zone then this can cause your premiums to nearly double. If the property is located in an area that has a higher insurance premium, it doesn’t mean it’s not a guy buy.

It’s just another factor that has to be added to the property analysis process, oftentimes there are calculations we miss; which could decrease the cash on cash return. One of my 3 unit properties is located in Rialto, Ca and the lender informed me that it was located near the fault line- increasing the home-owners insurance from $930 to $2200. That increase would have impacted my ROI(return on investment).

But after doing my own homework I discovered that the property was not within the hazard zone, thus decreasing my insurance premium.

7. Location Matters!

You can renovate a home in a great neighborhood and force appreciation. But no matter how much you fix up a home, in a bad neighborhood, the area dictates the selling price. Location plays a role in not only the valve of your property but your tenant base as well. Choosing to buy an investment property in a class D-C neighborhood limits your pool of tenants to choose from.

Although these areas probably have double-digit cap rates and high ROI, these high profits come at a cost!

That extra cost can be a high turn over rate, extended vacancy, vandalism etcetera. On the contrary, choosing an area within the path progress (developing city) your initial investment can grow exponentially. Many cities are currently experiencing gentrification across the U.S, investing in these areas prior to development, can create high appreciation.

8. Look For Bargain Deals

Regardless of what type of market your in, there are always real-estate deals to be had. Listed below are several different methods, used to find quality properties in any type of market.

1. Off-Market Deals Off-market deals are one of the most common practices amongst investors. It involves building a relationship with a broker or property owner and becoming the first person that comes to mind when they think of selling. The Broker brings you the deal because you have a reputation of closing the property quickly, the property owners bring you the deal because he trusts you. If the property is brought to you before it hits the open market, it prevents the price from being inflated by other investors.
2. Direct Mail-Direct mail is a technique that involves sending hundreds sometimes thousands of letters to property owners with the hope of hearing something back. The method is most successful when sending out mass quantities, because a small percentage will respond, and a fraction will become potential sellers.
3. Networking Attending real-estate investing meet-ups, seminars, and social meet-up platforms like Bigger pockets, allows you to build relationships with like-minded people. Through the power of networking, you’d be surprised what deals people may bring your way. If you aren’t ready, attend a local real-estate meet-up and begin building connections.
4. Newspaper-There are rare cases when property owners aren’t up to date on technology and choose to place their homes in the local newspaper. There have been countless times when jewels are discovered in the city papers. When looking for a deal, makes sure all the rocks are un-turned.

9. Duplex Design

Duplexes have unique designs and layouts, architects design homes with specific designs and layouts to represent their style and individuality. However, when designing a home sometimes these additions that add visual flair can increase maintenance costs. Listed below are three multi-family characteristics I try to stay away from.

Flat roof

Flat roofs are often found on older Spanish style builds. If the Roof is not routinely maintained it can cause interior leaks, when the water has nowhere to flow it begins to leak down into the interior of the home.

“When looking for a duplex focus on roofing designs that can reduce your expenses by decreasing maintenance cost on your property”.

Utilities

Finding shared utilities on your search for a property is “icing on the cake”. If the utilities aren’t shared, you (landlord) may have to foot the bill, or you can charge the tenants for water usage based on fractional payments.

Building Exterior

The exterior of the building is another area that requires a certain amount of maintenance. Certain materials may cost less to maintain than others, like wood, for example, every 2-3 years it needs to be re-stained. Materials like stucco and brick are very low maintenance. Focusing on hard-surfaced materials can drastically decrease your capital expenditures.

11. Layout Of The Building

The layout of the property is another factor that plays an important rule when choosing the right duplex. If you plan on living in one unit and renting out the other, choosing a detached unit adds an extra level of privacy and quietness.

Duplexes can be designed in an up and down, top and bottom, and detached fashion. So, if your choosing a property that your considering living in “keep this in mind”

12. Pay Close Attention To Shared Spaces

When purchasing a duplex, tri, or quadplex, chances are there are going to be areas of the property that are shared. If you minimize the areas of shared places on the property, it can reduce conflict when it comes to the tenant’s personal space.

Shared plumbing

Clogged toilets, sinks, and tubs are some of the headaches that come along with property ownership. Buying a duplex that does not share plumbing, makes it easier to isolate which tenant clogged the system due to negligence. If the tenant puts floss, food, napkins anything that doesn’t break down, then they can be charged for the repair.

Buying a duplex with shared plumbing makes it nearly impossible to find out which tenant was the cause of the clog.

Remember, if you find a property that doesn’t meet these guidelines it doesn’t necessarily mean that it’s a bad deal.

13. Stay Away From The Fixer-Uppers, Unless…

As a beginner investor, it’s hard enough to gather up the courage to buy your first deal. Choosing a property that needs rehab could add another hurdle to the equation. As a novice investor, there is a level of experience that is needed when it comes to vetting and scheduling contractors, interior designing, and meeting deadlines.

So, if you lack that level of experience needed to perform a proper rehab, it can cost you more, than if you were to find a property that needed minor repairs.

Unless you have a mentor, choose a property that only needs small repairs like paint, flooring, and landscaping. As you develop experience, fix and flip could be another investing option to consider.

14. Make Sure The Units Are Legal

There are many cases when properties have additional units that haven’t been legally permitted. Thoroughly go over your title documents to determine if all of the units are were built legally.

If the units weren’t permitted by the city, then additional costs may arise after your purchase. The city may require you to have the buildings reconstructed to meet city guidelines or even worse completely torn down.

15. Follow Through With Tenant Estoppels

When purchasing a duplex, if there are already tenants in place make sure the seller provides you with tenant estoppels, along with the lease agreements. This certification is considered a legally binding document, whereas the tenant agrees that the information regarding the lease is valid.

Final Thoughts

For the beginner or the experienced investor, duplexes, triplexes, and quad-plexes are a great way to build your passive income portfolio. But there are many factors that come into place when selecting the right property.

With these 15 tips, you should have everything you need to choose the right investment property.