You may think it is a great idea to help defray the costs of buying your own home by purchasing a two-family house or duplex and finding a renter to help you cover the mortgage. You may be right, but you must also consider how such a scenario may change your life, your finances, and the degree of privacy you will have.

Here are eight things to consider before you take that step and purchase a two-family home.

Key Takeaways

  • Purchasing a two-family home can improve your finances if you rent out the second unit, but you must be prepared for late rental payments, nonpayment, and gaps between tenants.
  • Keep in mind that you may be subject to stricter mortgage criteria, plus you will sacrifice some privacy and your tax filings will become more complicated.
  • Consider, too, the location, and your role as a landlord who collects rent and must keep up with maintenance for the entire building.
  • Finally, think about resale, which may sometimes be more difficult than for a single-family home.

1. Location

Your choices of potential neighborhoods may be significantly limited because multifamily housing—which is any housing other than a single-family home—may not be allowed due to zoning in all neighborhoods. Urban areas often have more multifamily housing units, while suburban areas tend to have single-family homes or townhouses.

You also need to consider whether or not the location you pick will be popular for potential tenants, as well as for you and your family to live. If you buy a home in a less desirable area of town, for example, you may have a harder time finding quality renters and will suffer from a lack of amenities nearby.

2. Financing

You could find different challenges when seeking to finance a two-family home from mortgage lenders. While you can use the potential rental income to help you qualify for the purchase, you will still need to have good credit and a low debt-to-income (DTI) ratio, as well as come up with a larger down payment—usually about 25% or more with multifamily housing. Banks know that tenants can move out and that you may need to pay the full mortgage yourself until you find another tenant.

3. Property Cost

Two-family homes will usually cost more than single-family homes. So not only will you need to come up with a larger percentage for the down payment, but also the down payment itself will tend to be higher because it will likely be based on a more expensive property. Be sure you have the funding to pay for this added cost.

4. Privacy

When you buy a two-family home and live on one side (or, downstairs or upstairs), your tenants will be able to stop by at any time with questions or problems related to their rental home. (Remember, as the landlord, you are responsible for making sure that everything is in working order.) You may hear them through your walls, and they could potentially hear you.

When you are the landlord, you naturally have less privacy than is usual in a shared dwelling. And if you rent to more than one person, your privacy may be subject to even greater infringement.

5. Rent Collection

You will need to be comfortable collecting rent from your tenants in-person and be ready to face the possibility that they may not pay on time—or at all. Their late payment or nonpayment can affect your cash flows as well as your ability to pay the mortgage if you rely on rental income to cover that cost.

If you have to evict the tenants for nonpayment, that can take months and may require hiring legal help. And while this is going on, you will be living next door to them.

6. Vacancy Expense

When your tenants move out and the rental portion of the property is vacant, it is known as a vacancy expense. Essentially, you will need to cover the whole cost of the vacancy until you get the property rented again, including utilities. You may end up with additional repairs and painting costs between tenants to fix up the property for the next occupant. You may also need to pay for advertising to get a new tenant from a listing service or realtor.

7. Taxes

Your tax return will become a bit more complex if you choose to become a landlord. There is an entire IRS publication dedicated to the rules of residential rental property (Publication 527) that you will need to read so that you don’t break the rules and can avoid getting in trouble with the IRS.

Different chapters cover rental income and expenses, depreciation, reporting requirements, and even rules for the personal use of the property. You will also need to add an entire schedule to your tax reporting called “Supplemental Income and Loss,” or Schedule E. However, there also are tax advantages, such as being able to write off expenses connected to your rental income.

8. Selling the Property

Selling a multifamily home tends to be more complicated than selling a single-family home for a number of reasons. First, there simply are not as many people looking for multifamily housing as there are buyers for single-family housing, which can make selling more difficult.

Second, if you have tenants in one of the units, you must take their rights into consideration when you put the home up for sale to avoid legal tangles. And a potential buyer—whether they intend to live in the building or not—will want to know details of the tenants' lease agreement, what's included in the rent, whether a security deposit is involved, and more.

Overall, it may be simplest to sell a multifamily home when there are no tenants occupying the second unit.

The Bottom Line

Buying a two-family property can be a great way to help pay your mortgage, but be sure you are ready to deal with all the issues that will arise when you become a real estate investor and a landlord.

Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).