Paid-off duplex: equity to buy another property? or wait until I finish school??

Question

Paid-off duplex: Should I use the equity to buy another property or wait until I start my new job?

Hi BP community,

I’m 32, single, and have been listening to the BiggerPockets podcast since 2017. I’ve wanted to own rental properties for years, and a few years ago, while attending college for electrical and computer engineering, I bought a duplex to help supplement my income (I a part-time college job ATM).

I currently live in one side and rent out the other. Each unit has three bedrooms, 2.5 bathrooms, and a walkout basement. The entire duplex is paid off.

The property was in rough shape when I bought it. I initially spent about $10,000-$13,000 on materials and did all the renovations myself. Since then, I’ve gradually renovated my own unit and am currently finishing its basement. I handle most repairs myself, which has kept my out-of-pocket maintenance costs low, though I recognize that larger repairs and replacements still need reserves.

The rented unit brings in $1,700 per month following a September increase. That’s at the high end of my neighborhood’s rents. I’ve focused on providing a well-maintained property and pricing it accordingly. Based on the improvements to my side, I estimate it could rent for around $2,000 per month, although I still need to confirm that with comparable rentals.

I recently completed my bachelor’s degree and am finishing my master’s. I also have a job lined up with Honeywell after graduation.

I’m eager to grow, and I’m considering taking out a mortgage against the duplex to help purchase another property. I would move out of my current unit and rent out both sides.

I’d appreciate advice on a few questions:

• Would you wait until graduation and the start of the new job, or consider buying sooner if the right deal came along?
• How would you evaluate whether borrowing against a paid-off duplex is worth the additional risk?
• What cash reserves and cash flow would you want before making this move?
• For those who expanded from their first owner-occupied duplex, what do you wish you had considered?

Would you wait until graduation and the start of the new job, or consider buying sooner if the right deal came along?

How would you evaluate whether borrowing against a paid-off duplex is worth the additional risk?

What cash reserves and cash flow would you want before making this move?

For those who expanded from their first owner-occupied duplex, what do you wish you had considered?

I’m proud of what I’ve built so far and want to keep growing, but I want the next purchase to make financial sense rather than simply satisfy the urge to do something new.

Current financials: I make ~$18K to 20K per year from my job and bring in another 20K before taxes from the one-side rental. My thought was to let the rentals pay for the new place. thoughts??

Current taxes on the whole unit are about 5 K per year.

Before taxes, I would make $40,800 per year on the rental units after income tax and property tax. Insurance is about $2400 a year.

Dan Beaulieu · Answer

Okay, so here's how I'd look at this one.

First, your $40,800 after tax number is a little optimistic. If both sides are rented at 1,700 and 2,000 that's 3,700 a month or 44,400 a year. Taxes 5k and insurance 2,400 leave about 37k before vacancy and maintenance. I'd still knock 10% for vacancy and another 10ish% for repairs even though you DIY a lot (stuff breaks when you're not living there anymore). Call it roughly 2,000 to 2,200 a month net before any new loan. Not too shabby for a paid off duplex.

Now the real question is HELOC while you still live there vs cash out DSCR later. I'm a lender, fwiw. While you're owner occupied a HELOC or cash out on a primary tends to price better and leave you more flexibility (draw what you need, when you need it). Once you move out and both sides are investment, a lot of shops want DSCR to clear around 1.20 to 1.25 after the new payment. So if you pull 150k at say 7.5% on a 30 year amort, payment is about 1,050 a month. Your 2,000ish net becomes around 950. That still works, but it doesn't leave a ton of room if one side sits empty for 3 months or the roof shows up.

I'd wait for the Honeywell job before you lock anything big, mainly because your documented income is thin right now and the next deal is gonna care about that if you're buying owner occupied again (FHA/house hack). If a screaming deal shows up before graduation, a HELOC against the duplex to fund the down payment can work, but only if you've got 6 months of BOTH properties sitting in cash first.

One thing people miss when they leave a paid off house: the emotional hit of putting debt back on something that's free and clear. Run the deal as if you already owed on the duplex. If it still looks good under a 10% rent haircut, then you're not just hoping.

Would you rather house hack the next one and leave this duplex mostly alone, or pull equity and buy a pure rental?

Devin Peterson · Answer

Abram, a paid-off duplex is a nice spot to be in. A few things I'd look at from the lending side.

Since you live in one side, you'd most likely be looking at an owner-occupied HELOC or a cash-out refi, and both of those qualify on your personal income and debt-to-income. Lenders will usually count part of the rent from the other unit (often 75% of it), but with about $18-20K of job income right now you may qualify for less than you'd expect. Once you're in the Honeywell job, your options open up a lot. Some programs can use a signed offer letter, but usually only when the start date is close to closing, so timing matters.

On HELOC vs cash-out: a HELOC lets you draw only what you need when a deal shows up, and you only pay interest on what you've drawn, but the rate is usually variable. A cash-out refi gives you a lump sum at a fixed rate, but you're paying on the whole amount from day one. If you don't know when the right deal will come along, a line you can sit on is usually more flexible. Down the road, if you move out and the duplex becomes a full rental, there are also DSCR-based options, including DSCR HELOCs from some non-QM lenders, that qualify on the property's rent instead of your personal income.

On risk, run the duplex numbers with the new payment included. Taxes and insurance alone are roughly $620 a month, so take the $1,700 rent, subtract that, the new loan payment, and realistic maintenance and vacancy. If both properties can still carry themselves through a couple of empty months, you're in good shape. I'd want several months of total expenses for both properties sitting in reserves before pulling the trigger, especially while your income is still at student level.

If it were me, I'd line up the financing closer to graduation rather than force a deal now. But if a great deal pops up sooner, it's worth finding out exactly what you'd qualify for today so you're not guessing.

Matthew Morrow · Answer

@Abram Edawrd Inman doing the work yourself and ending up with a paid-off duplex is a great spot. I used the equity in my first house to buy the next one, so I'm a fan of putting it to work. I'd just want the income in place before I borrowed against the place I live. Most lenders will look at you very differently once the new job starts, and waiting a few months gives you time to get a renovation budget together and pick the right property. Every situation is different, so I'd talk to a lender now about what they'd need from you. Curious to hear how you end up approaching it.

V.G Jason · Answer

You make poverty line money, why the fuck is thought process to ask about leverage? You're talking to people who sell debt for a living here, you're feeding the sharks and pathetic folks that suggested it.

Finish school & keep this property as a home(and extra income). Leverage that honeywell job to provide you a new opportunity into RE, or another asset class. Life will come at you fast, and you're already trying to weigh it down.

Gregory Acs · Answer

Having a paid-off duplex puts you in an interesting position. Before tapping into the equity, I'd compare the new debt payments against your rental cash flow and reserves. Your upcoming job could also change your financing options.

Are you planning to buy your next property in Missouri or considering other states?

Caleb Brown · Answer

That's a tough decision. I would start exploring and analyzing deals. If a deal checks the box then I would consider pursuing. You can use the funds you have or look at refinancing the duplex. Would you do a house hack scenario again? You can get in the door with >5% down. If you moved out of your current duplex it'd be generating great cashflow.

Nyisha Walton · Answer

Abram, you have built a strong starting position with a paid-off duplex. Because you still occupy one unit, I would compare an owner-occupied HELOC or cash-out option using your current income and offer-letter timing against waiting until both units are leased and evaluating an investment-property or DSCR structure. If you share the estimated value, desired equity draw, current and projected rents, credit range, Honeywell start date, target purchase price, and the reserve amount you want to preserve, I can model both paths and tell you which one appears safer without pushing you into a loan too early.

Abram Edawrd Inman · Answer

I should add I have a little more than ~40k in reserve funds to support the unit's large expenses or extended vacancy if need be.

Abram Edawrd Inman · Answer

It was late. Apologies for the basic math; I messed up, lol. Currently, I have about ~+40k in cash reserves, so I thought that would be good to cover any unexpected expenditures. So that would be more than enough to cover 6 months if something bad happens, from what I figure.

Ryan Brown · Answer

@Abram Edawrd Inman, congrats on what you've built. A paid-off duplex at 32, renovated with your own hands, puts you ahead of most people on this site. I voted stay put for now too, but not because I think you should slow down. I think the Honeywell job is the thing that unlocks your next move.

Right now your biggest advantage is that nothing can take the duplex from you. Once you borrow against it on $18-20K of part-time income, you're putting your safety net on the line at the point where your income is the weakest it's going to be. Lenders will see it that way too, so you'd likely get worse terms and a smaller loan than you'd expect. Let the stable paycheck come first. It makes the financing easier, and it gives you something to fall back on when a unit sits empty or a big repair comes up.

Once you've been at Honeywell for a while and have the pay stubs to show for it, you'll be in a great position for owner-occupied financing on another duplex or fourplex. That means a much smaller down payment and a better rate than an investment loan. Move into the new place, rent out your side of the current duplex, and now both sides are bringing in income. Then you just start over: live in the new one, learn it, fix it up the way you did the first, and repeat when you're ready. You don't even need to pull much equity out of the paid-off duplex to make it work, which keeps it as your cushion while you grow.

You said you want the next purchase to make financial sense and not just scratch the itch to do something new. That's the right mindset. Waiting a little isn't standing still when you're setting yourself up to buy on much better terms. Good luck with the master's and the new job.

Paid-off duplex: equity to buy another property? or wait until I finish school??

Paid-off duplex: equity to buy another property? or wait until I finish school??

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