Should You Build a Duplex or Multi-Family?

America’s real estate market has faced significant challenges since the 2008 recession. Record numbers of people have lost their homes to foreclosure, and even more people have found …

America’s real estate market has faced significant challenges since the 2008 recession. Record numbers of people have lost their homes to foreclosure, and even more people have found themselves hanging onto properties worth less than they owe on their mortgages. Although it’s a terrible time to be a seller, it’s a great time to be a buyer. It’s also a great time to start constructing a new house.

One of the smartest ways to ease the cost of homeownership is to build a duplex or multi-family residence. Lower construction and land costs, higher rents, and a larger pool of renters make it a good time to build multi-family homes. Building a multi-family home is about more than finding perfect house plans. It’s about enjoying the financial advantages that real estate investment has to offer. If you have the temperament and resources to be a landlord, capitalize now to take advantage of the slumping real estate market.

Making the Investment

How you pay for your multi-family home depends on how you plan to use the property. If you want to build the house and live elsewhere, then you’ll have to stick with conventional financing. Alternatively, if you plan to make it your primary residence, then you can choose between either conventional financing or other options, including FHA and VA loans. FHA and VA loans require far lower down payments than conventional financing. A conventional loan would require at least a 20-percent down payment, but an FHA loan requires only a 3.5-percent down payment.

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The main disadvantage of FHA and VA loans is that they come with borrowing limits. Depending on the part of the country in which you build, your borrowing maximum might be less with FHA or VA loans. Also, Fannie Mae and Freddie Mac might expect FHA and VA borrowers to have a certain amount of cash reserves. For example, some FHA loans require borrowers to have three months worth of mortgage payments in reserve.

Building Your Multi-Family

While you’re searching for multi-family house plans, keep these considerations in mind:

  • Land dimensions. In addition to discussing certain requirements with your local building department, including distance from your building to the borders of adjacent lots, consider how much room you need to reserve for tenant needs including parking. You might have to pave some extra space on your land or build a large, multi-door garage, so choose your house plan accordingly.
  • Interior space. Building units that are cramped or poorly laid out will mean fewer interested renters and potentially lower rents. Make sure to build the kind of units that you would want to occupy.
  • Amenities. Avoid skimping on amenities that can lead to increased rents. For example, putting a dishwasher in every unit is a low-cost but effective way to make your dwelling more attractive to renters. You’ll also want to make sure that you get the best quality basics, like mailboxes from
  • Good materials. It’s tempting to spend as little upfront as possible on your multi-family construction. However, keep in mind that investing in good materials now could mean fewer renovation and maintenance expenses later.

Figuring Out Taxes

Owning investment property provides many lucrative tax advantages. Essentially, you’ll set up your property investment almost like a business. You count the rents you collect as income, but everything else is deductible from rental income including improvements, repairs, maintenance costs, marketing costs, property tax, and other related expenses. You can also claim depreciation, which deducts from your rental income. Work with an accountant to learn how owning investment property could actually lower your tax obligations.

Additionally, owning a multi-family property shelters your profit from selling your property. If you sell your property for less than its depreciated value, then you typically pay capital gains tax and Section 1250 recapture tax on any accumulated depreciation. However, if you use the proceeds from the sale to purchase a new investment property, you can use a 1031 exchange to carry the basis forward when you pay for your new property. You never pay taxes on the proceeds until you cash out of the real estate investment business.

Making It Happen

Throughout the process, work with people who have experience in multi-family issues. Your team of builders, realtors, accountants, property managers, and other professionals should have experience in designing multi-family house plans, building and managing multi-family construction, and completing transactions related to multi-family investments.


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