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Housing prices have more doubled during the past decade, and mortgage rates have done the same in less than a year. So what's a cash-strapped home buyer to do?

Buy a duplex and use the rental income to help pay your mortgage.

Duplexes have long been a first step for first-time rental owners and those looking to increase their buying power because you can live in one unit and use the rent from the other to help qualify for a larger mortgage than you otherwise might.

While that strategy has been a challenge during the past decade because of competition with investors, it's emerging once more as a viable option for owner-occupants.

"I've seen an uptick in this strategy," said Richelle Taylor, a sales agent with RE/MAX Results and the Simply Sold Realty Group in Brooklyn Park.

Owner-occupied duplexes can cut mortgage payments in half or more, depending on financing costs and market-rate rents in the area.

That's not the only way to help boost your buying power. A growing number of homeowners are supplementing their income with accessory dwelling units and by making space in their home for a short-term vacation rental.

Here's a breakdown of some of those options.

The duplex comeback

A duplex is essentially a house with two living units, typically side-by-side or stacked on top of one another. For generations they have been the gold standard for buyers who want to use the rental income to increase their buying power and those wanting to start investing in real estate.

During the past decade, though, many duplexes have been off-limits for entry-level and budget-conscious buyers because rising rents have made rental properties a hot commodity among traditional investors. That has created especially stiff competition for those who intend to own and occupy them.

Those challenges are starting to dissipate. Higher borrowing costs — and home prices — have made it difficult for many investors to make duplexes cash-flow, meaning it's gotten more difficult to bring in enough rent to cover the rising cost of owning a rental.

Redfin reported that during the third quarter of 2022, investor purchases nationwide fell more than 30% year over year. That was one the largest annual declines since the Great Recession, outpacing a 27% drop in overall home purchases nationwide.

"It's unlikely that investors will return to the market in a big way anytime soon," Redfin senior economist Sheharyar Bokhari said in a statement. "This means that regular buyers who are still in the market are no longer facing fierce competition from hordes of cash-rich investors like they were last year."

Staci Horwitz, operations director for the City of Lakes Community Land Trust (CLCLT), agrees that the equation for those who intend on owning and occupying a duplex is changing in their favor.

"The market has calmed somewhat, so competitive bidding is less of an issue now," said Horwitz.

During the first half of 2022, the Minneapolis-based nonprofit, which provides counseling, support and access to a number of nontraditional paths to homeownership, fielded an increase in the number of queries from prospective duplex owners, Horwitz said.

At CLCLT, buyers are able to purchase owner-occupied duplexes through the Homebuyer Initiated Program, but Horwitz said that higher duplex prices have made it difficult to find a property that makes financial sense.

She said it's been about two years since a buyer has been able to purchase a duplex through its program in part because CLCLT buyers have been outbid by other owner-occupants and investors.

Taylor, a rental owner herself, said rental property isn't for everyone, especially for those who are already overwhelmed by the prospect of homeownership.

"It definitely requires a person who is brave enough to take on homeownership and the issues that come with maintaining a home as well as issues that come with being a landlord," said Taylor. "These things can be overwhelming."

Taylor said duplex buyers are often disappointed because most duplexes are not owner-occupied and are less likely to be updated and staged. That's especially true, she said, when it comes to properties that are affordable to entry-level buyers — typically those that are priced less than $400,000.

Short-term rentals and ADUs

The sharing economy has been a boon to homeowners, especially those with a little space to share. Short-term rentals, which are usually vacation rentals that are marketed on national platforms such as Airbnb and VRBO, have become an increasingly popular way to bring in extra cash.

Though that cash can't be used to qualify for a mortgage, Airbnb recently said that during 2021, the typical host raked in more than $13,800 — an 85% increase over 2019. And, according to an Airbnb survey, nearly 40% of all hosts in the U.S. said that the income earned through renting out space in their house has helped them stay in their home.

Accessory dwelling units (ADUs), a technical term for what used to be known as "granny flats" and "mother-in-law apartments," are also becoming more popular for buyers.

What's the difference between an ADU and a duplex? Typically, duplexes are considered distinct living units with different mailing addresses even though there's usually only one owner.

CLCLT has developed several single-family houses with ADUs aimed at first-time buyers, but as construction costs increased, the approach made less sense. Horwitz said the last home with an attached ADU was completed and sold in 2019.

"Construction costs reached a point where it was no longer feasible," she said.

That doesn't mean ADUs are off limits. Many houses have ADUs that have been created within existing space.

Bruce Erickson, a sales agent with Compass Real Estatewho was previously with Coldwell Banker Realty, recently listed a mid-century modern rambler in the Waite Park neighborhood of northeast Minneapolis that was built in the late 1940s as a single-family house but has a finished lower level that included an ADU and a double lot with room to expand.

In the listing, Erickson touted its potential as a nontraditional rental, and Erickson said many buyers were attracted to its income possibilities.

"Don't miss this impeccable property with its built-in Airbnb and numerous development possibilities," the listing said.

The 1,712-square-foot house, which had been listed for $429,000 in early October, quickly received an offer after Erickson dropped the price $10,000 a month after it hit the market.

"No question the flexibility of the space to be used as a short-term rental, a mother-in-law apartment or converted back to a family room space added appeal," Erickson said.

Jamie Stolpestad, a partner in YardHomes MN, a Twin Cities startup that builds ADUs, said they're especially good for multigenerational families who are looking for a convenient and affordable way to house a relative who wants some degree of independence.

Stolpestad said the company has built a dozen ADUs costing $125,000 to $180,000.

"ADUs have gone from an expensive piece of yard jewelry for generally affluent consumers," he said, "to practical options for seniors instead of senior living [or] skilled nursing facilities."

Help for duplex buyers

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