Updated: Nov 28
We were just out of college, less than broke, with a surprise baby on the way.
Scared that we weren't ready to step into the adult world, we scrambled for solutions to start life off on the right foot.
We became laser-focused on building financial security for our family, surrounding our soon-to-be child with a safe neighborhood and great school, and building wealth to pay for his college education.
We did the unusual, which any usual person like me can do.
We purchased an investment property.
Fast forward to today, and we sold our duplex, which during twenty years of rent paid for itself, and more. The result? We'll walk away with around $200,000 in after-tax money, more than enough to carry on the promise made to my parents and pay for our kids' college education.
Here is how we got to where we are today.
First, we were blessed and, compared to many others, born into a certain amount of privilege. If you're looking for a "we pulled ourselves up by our bootstraps" story, you won't find it here.
I had won the genetic lottery. My parents were hardworking people. Tough as nails. They demanded personal responsibility, gave me the gift of a college education, and the know-how to invest wisely.
My father's side hustle was growing his rental property business. And I grew up in the business with him mowing lawns, welcoming new tenants, and sometimes evicting others.
I was not a personal finance expert, but I did know one thing from my upbringing: walking the path most common of buying a starter home was the path for the rat race. So, we purchased a duplex.
Hope's hard-working parents also made sacrifices and gave her a car. We had no credit card debt; her student loan was today's current average. In other words, compared to many others, we were positioned well. It was on us to keep it that way.
Bless my wife. She was the opposite of spoiled.
We had two full-time incomes just after graduating college that produced enough to buy the home most people would want at our age. That's what most would want or even demand.
I shared the back of the napkin math of our two choices, at least as I saw it, and she agreed with my assessment.
On one hand, we could purchase a 2-4 unit apartment. We could save enough in three years to build a nice residential property while maintaining ownership of the duplex as an investment.
On the other, a starter home with a picket fence in the front yard. The monthly housing expenses would be triple what we would pay monthly to live in the duplex. In three years, we would not have enough saved for a nicer home or the luxury of a long-term investment.
We made a three-year sacrifice that paid dividends for decades. Many spouses would never agree to this uncommon path.
A home is only an investment if it can produce cash flow. At least, that's how I see it. I explain why in our previous post, Is a Home an Investment? Using financial markets and housing market averages, you can see that returns in the financial markets are roughly 10 times greater than a home.
We look back at our time in the duplex with fondness. We had financial security, a safe home, and the joys that come with a first child. Perhaps the belief that our choice was a sacrifice made sense when we were making the choice but not when we were living the choice.
That first big financial decision in our marriage changed our lives. We do not have enough in our kids' 529k's to pay for their college education. And we would not have been truly diversified in our wealth building journey.
The sale of our duplex will pay for our kids' college education and much more.
As we walk away from the rental property business, we feel confident sharing some lessons we learned in our journey and hope it can help others who face similar circumstances as we did.
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17 Tips to Own a Duplex
How to get a residential loan
If you purchase a property that is four units or less and live in the property for a certain amount of time, you can get a residential loan. Residential loans are often 1% lower than commercial loans.
Purchase a duplex with only 3% down
We were able to obtain an FHA loan when purchasing our duplex because it was our first residential purchase. Keep in mind that commercial loans typically require 20% down.
Open a secure account with the highest savings interest rates in the nation.
Invest in true diversification
I was ridiculed by a financial planner in 2009 for owning a rental property. In her attempt to sell me high fee investment products by making herself seem smart, she failed to recognize that the stock market was down 50% from the financial collapse, and in that same month, I raised rent.
Plan how, when, and if you depreciate the property
You can front-load the depreciation of your rental property. However, don't do it just because you can. We made this mistake. Be strategic. If you're in a low tax bracket, consider not taking the depreciation because you eventually will pay capital gains tax on what you depreciate.
There are ways around this, such as a 1030 tax exchange, but that handcuffs you to remain in the rental property business. You can read the details of this decision in the Investopedia article How to Calculate Rental Property Depreciation.
Above-the-line tax deductions add up
Above the line tax deductions reduce your adjusted gross income (AGI). Doing so can qualify you for more advantageous tax breaks, such as certain tax credits.
As an example, the cost of maintaining the property are above the line tax deductions.
These deductions are not the same as the deductions that you itemize. Itemized deductions (and the standard deduction) are dollar amounts that are deducted from your AGI. You can take above the line tax deductions and the standard deduction.
Click here for a short video tutorial I created to help folks understand the difference between above the line tax deductions and itemizing.
Keep rent below the market average
I realize this is unusual advice, but it served us well. We were not full-time landlords working to squeeze every penny of profit out of our investment. The upshot of keeping rent below the market average is that renters are less likely to move. We had a tenant on each side of our duplex that rented from us for nearly a decade.
Treat your renters how you want to be treated
Hope and I took turns fostering relationships with our tenants. We treated them as we expected to be treated, respecting our property as their home.
Use a month-to-month lease
Evictions are generally not necessary in the state of Ohio if renters sign a month to month lease. If the arrangement isn't working, we can simply choose to not rent to them anymore, as long as we gave them 30 days notice. And vice-versa.
An argument can be made for one year leases, but we were unwilling to hold renters accountable to the full year if they needed to move.
Purchase a property if you can get at least 1% in monthly rent for the purchase price
This is commonly referred to as the 1% rule. The Investopedia article 1% Rule in Real Estate: What It Is, How It Works, Examples does an excellent job of diving into how it works.
Purchase in a good school district
Good schools expands the possibilities of good renters. Some states disproportionately fund schools with property taxes, so keep an eye on what this strategy could cost you over time.
The building should be all brick
Brick does not require maintenance. Anything that does not require upkeep is an investors friend.
Stick to one-story dwellings
Units with stairs eliminate older folks and the disabled from renting. You want to cast a wide net of those who can and would rent your property.
Avoid older properties
Older properties are generally more expensive to maintain, as we wrote about in our post The Costs of Buying and Renovating an Older Home.
Do thorough background checks
We hired someone to do background checks for us, and it was worth every penny.
Have significant savings set aside
Expenses add up at the most inconvenient time. Air conditioners need to be replaced, and so do roofs. Units need to be repainted when there is turnover. New appliances are inevitably necessary. The list of potential expenses is long.
Purchase umbrella insurance
An umbrella insurance policy is a type of personal liability coverage that goes above and beyond the amount that regular home insurance offers. You must own a standard homeowners policy first; the umbrella policy kicks in after the regular coverage has been depleted.
Have a good handyman
If you're not handy yourself or don't have the time to fix the odd jobs that pop up, have a good handyman you can turn to at a moment's notice.
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