We're thinking that buying a duplex would be a good idea. What do you think?
Buying a duplex is an excellent way to build equity and reduce taxes, as long as you live in the property, as opposed to be being an investor. The income you receive will pay all or part of your mortgage.
For example, suppose you buy a duplex using an FHA loan. You put 3.75 percent down on the $200,000 property on a 30-year note. At 4 percent interest, your payment would be about $1,073, slightly more or less depending on various factors. The duplex then pays all or part of your note. There are certain tax advantages to owning a duplex since some of the interest you pay on the mortgage is deductible from income. There could also be a depreciation deduction.
Duplex buyers have to meet the standard guidelines for FHA loans and conventional mortgages. The best rates go to borrowers with credit scores of 740 or above. FHA loan requirements for single-family homes and multifamily homes are similar, but borrowers cannot have a nonoccupying co-signer for an FHA mortgage on a multifamily property.
Debt-to-income ratios for conventional financing cannot exceed 45 percent, with slightly looser guidelines for FHA loans.
FHA borrowers can use gift money for all of their down payment, while conventional borrowers must use some of their own savings.
For young people who have not been homeowners, buying a duplex is a good way to get started in real estate. After owning the property for a few years, their savings could add up to the amount needed for a down payment on another home or rental property.
A caution, however. You will be in the rental business and this is usually not a walk-in-the-park. You assume all the liability associated with having a renter. You'll want to maintain a good property to attract a good renter. But if the renter damages your property or doesn't keep it up, it usually is your financial problem.