Is Buying a Duplex a Good Investment in 2022?

Is buying a duplex a good investment in 2022? Only you can answer that question for yourself. What we can tell you is that duplexes are a great way to invest in multifamily assets on a small scale. If you are new to real estate investments or a seasoned investor who doesn’t want the hassle of dealing with a large property, duplexes (and triplexes) may suit you best. And there are several advantages smaller properties present.

The real estate market is still hot right now. Even though the housing market is showing signs of leveling off, the cost of single-family homes is astronomical. So Images of a red brick duplex illustrating that buying a duplex has attractive investment rent. However, some people aren’t able or ready to purchase a home—and renting is their solution.  Investors who prefer smaller property think buying a duplex is a good investment for them in this market—an attractive opportunity to earn either personal income or tax-sheltered income if you invest with a self-directed retirement IRA.

Read on to learn critical information you need to decide if buying a duplex is a good investment for you and/or for your self-directed IRA. We’ll cover the advantages investing in duplexes has over larger multifamily properties, explain different income-earning opportunities these smaller assets offer, and show you how advantageous a duplex investment can be in an IRA.

Why Do Investors Think Buying a Duplex Is a Good Investment?

Large multifamily properties such as apartments or townhomes do offer more units to rent, which means more income each month. However, larger property is much more expensive to buy, and managing these properties can be a challenge even for seasoned investors.

Here are a few reasons some people think buying a duplex is a good investment alternative to larger multifamily assets:

An easy and affordable learning experience for less experienced investors.

Duplexes consist of only two units compared to 100-200 plus. For obvious reasons, smaller multifamily property is more affordable than larger property. So, buying a duplex is much less expensive than buying a condo complex. Affordability is key if you’re a beginner investor.

You’ll also have less maintenance issues. And you’re only dealing with a few unhappy tenants when things go wrong. Additionally, income and expenses are easier to track. While your main goal may be to invest in larger complexes in the future, duplexes are a great starting point to learn the ins-and-outs of investing in multifamily property in your IRA or with personal funds.

Small property has less overhead and minimal work compared to larger property.

This is self-explanatory—but we’re going to explain it anyway because even seasoned investors often prefer smaller property for these reasons.

It is much less expensive to maintain a single dwelling with only two or three units than it is to deal with multiple buildings housing multiple units.

A new roof, general upkeep of the property, and improvements are more manageable on a smaller scale. You’ll only have to deal with two or three toilets instead of 100 or more. Lawn and other maintenance services are cheaper, and property management is not as time consuming. Minimal overhead and less work equals smarter cash flow opportunity—and that equals more time to play as well as the potential to earn income to reinvest.

Duplexes are more attractive to renters than apartments.

Typically, duplexes are much roomier than apartments. Most have yards and offer more privacy than larger complexes, including condominiums. These features are important to renters with families and pets. Even though rent may be higher than the typical apartment, people are often willing to pay more for a back yard and privacy—and will hopefully be happy enough with those benefits to stay for longer periods of time than apartment dwellers.

Opportunities to Earn Income with Duplexes

Here’s how small multifamily homes can capture great returns on your investment:

Buying a duplex gives you two rental incomes for the price of one.

Investing in duplexes may not earn the returns that townhomes and condo complexes earn, but they do present greater opportunities than single-family properties. Often, buying a duplex costs the same as a single-family dwelling, but you have two units to rent out instead of just one. This can mean more monthly income than a single-family home. And even if one unit remains vacant for a period, you still earn income on the other unit.

Duplexes are versatile.

Another reason investors think buying a duplex is a good investment is the versatility of a two (or three) unit property. You have the option to rent one long-term and the other on a short-term basis. This can be especially lucrative if your duplex investment property is in a vacation location. In this case, short term rentals might earn more income than your long-term unit does in a much shorter time frame.

Smaller properties can also build equity over time.

This is true with any property, especially if it’s in a desirable location. Real estate investments are typically favored due to the potential equity growth for long-term investments. Savvy investors appreciate and look for property that has a history of consistent rental tenants and monthly income. If you’ve performed improvements to the building and grounds over time, that can also give the equity growth a boost when you decide to sell.

How Does Buying a Duplex Investment Work in an IRA?

Investing in real estate is one way smart investors take advantage of self-directed IRAs to build tax-sheltered growth for retirement. Real estate, like a duplex investment, is a popular alternative asset for those who want to diversify their retirement portfolios in assets that aren’t dependent on Wall Street.

Self-directed IRAs and other accounts allow plan owners to choose alternative assets that mainstream IRAs and 401(k)s housed with your employer, a bank, or broker don’t allow. Private equity, cryptocurrency, private lending, gold, and many other alternatives to the stock market are viable assets that help retirement plan owners reach their financial goals.

Here’s how investing in self-directed plans works:

Your self-directed account owns the asset.

The investment/property is purchased by your self-directed plan and is titled in your retirement plan’s name. This means you don’t have to take a withdrawal of the funds to invest and incur taxes and penalties for doing so.

Expenses incurred by the investment are paid with funds from your self-directed plan.

This is an IRS rule for retirement plans. Expenses for investments must be paid with plan funds and cannot be paid with personal funds.

Income is deposited directly into your retirement plan.

This is how you can invest in real estate and other assets on a tax-free or tax-deferred basis. You can even avoid capital gains when you sell investment property owned by your retirement plan. IRAs and other retirement plans offer different tax-advantaged status on investment earnings. If you have a traditional self-directed IRA or a solo 401(k), income grows in the account tax free but is taxed when you take distributions in retirement. Roth IRAs offer tax-free withdrawals in retirement on investment income.

Beware of prohibited transactions involving IRA investments.

Retirement plan assets and income are meant to benefit you in retirement and not before. For example, you and other disqualified persons are unable to live or vacation in IRA-owned property. Disqualified persons cannot buy an asset from your IRA or sell an asset to your IRA. As the IRA owner, you are also not allowed to perform any repairs, upgrades, or maintenance on the property yourself. You must hire a third-party who is not considered a disqualified person to perform these duties.

Prohibited transactions are critical to avoid, and IRC 4975 outlines every prohibited transaction for retirement plans that you should understand. Failure to comply can cause heavy penalties, taxation, and even disqualification of your IRA.

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So, Is Buying a Duplex a Good Investment for You?

Smaller multifamily homes like duplexes and triplexes have terrific advantages and income-earning potential. These can be perfect assets in self-directed IRAs for people who want to learn how multifamily property works before diving into larger property investments.

If you’d like to learn more about real estate in an IRA, please contact Advanta IRA. Our team members are experts in our industry, with nearly $2 billion in client assets under management. We don’t give investment advice, and we don’t sell investments. We do help you learn how to properly invest in alternative assets to build retirement wealth and oversee the administrative details of your account so you can focus on finding investments.

Additional reading:

4 Reasons to Invest in Duplexes and Triplexes and How It Works in an IRA

How to Invest in Real Estate in an IRA: A Beginner’s Guide

Investing in Rental Properties and Rehabs in an IRA Is Easier Than You Think

About Scott Maurer

Scott Maurer, Vice President of Sales for Advanta IRA, is a recognized expert in the field of self-directed IRAs. With a law degree from the University of Florida and as a designated Certified IRA Services Professional (CISP), Scott’s keen understanding of rules and regulations fuels his passion to educate others on the power of investing in alternative assets using self-directed IRAs. Scott is a frequent guest on retirement and investing webinars and podcasts, and he has shown thousands of individuals how to achieve financial freedom by teaching them how to use their retirement funds to invest in private placements, real estate, private lending, and more. Throughout his two decades in the industry, he has watched numerous unique investments unfold, giving him great perspective of what is possible when people take control of their retirement funds and investing decisions.