1. Buying a multi-family home will
limit your location options
If your goal is to get a duplex,
triplex or quadruplex to live in one part and rent out the other or others, you
may be limited in terms of the locations that you’ll get to choose from.
For example, where I work in San
Diego, multi-family units really aren’t found in many of the suburban
cookie-cutter type neighborhoods. To find one in San Diego, you’d have to look
in the more urban/downtown type areas or expensive beach communities like Ocean
Beach or Pacific Beach.
You might have an even more
difficult time finding a multi-family unit that you’d be happy living in if you
live in a more rural part of the United States. But if you’re not extremely
picky about the neighborhood you live in now, this could be your opportunity to
get in and make some good money over time.
2. Newton’s third law of
multi-family real estate
“For every benefit to owning a
multi-family property, there is an equal and opposite reaction.”
The main benefit of owning a
multi-family unit and living in one of the units is rental income. Every month
you’ll get a rent check that offsets your mortgage.
One downside? Tax complexity.
Just look at all the IRS rules regarding investment properties. Always
consult your tax professional prior to making a large investment purchase,
especially one that you expect to make deprecations and write-offs from.
Another benefit of owning a
multi-family unit and living in one of the units while renting out the others
is that you’ll always be close to your rental properties so that you can check
on the condition frequently. If loud music is being played late at night,
you’ll be the first to know about it. If a pipe bursts or a toilet is clogged
and your tenants need assistance, at least you won’t have to make a long drive
in order to fix the situation.
The drawback? You’re close to
your tenants, so that loud music bothers you, not somebody else. And if you
have a needy tenant, they’ll have easy access to you to voice their complaints.
3. Financing a multi-family home
is tricky but doable
It may seem impossible to buy a
duplex or multi-family unit with your budget, but the reality is it might not
be as hard as you think.
How do you know what the second
or additional units will rent out for? If you don’t already have a lease in
place (which you probably don’t), check rentometer.com for average rents in the
area and use craigslist to help you verify rental prices for similar units.
Keep in mind, the potential rental income may help you qualify for the loan,
but it’s not the only factor to be considered.
You’ll still need to have good
credit, a low debt to income ratio and a large down payment, typically around
25 percent of the purchase price or more. On a $500,000 duplex, you’re looking
at a down payment of $125,000, not including your closing costs such as escrow
and loan fees.
Use this calculator to
figure out your debt to income ratio.
4. Is it even legal?
If you can qualify, lending
guidelines for multi-family units are straightforward. One thing can pose a
problem, however, according to mortgage broker Anthony Lococo. “[W]hether or
not the second unit is permitted. Just because it produces income doesn’t
mean it’s considered a “unit”. Granny flats are a good example…”
Most real estate agents can tell
you how hard it is to tell a house with an unpermitted granny flat. Financing
can be even more difficult. If the property is not an actual duplex, just a
single family house with a large wall partitioning areas and two separate
kitchens, lenders may not be able to consider the potential rental income in your
qualifying ratios, even if you can, in fact, rent it out.
5. What if you want to move out
someday?
If you buy your multi-family unit
with the intention of living in one of the units, the time may come when you’re
ready to move out and get something bigger. In that case, you may choose to
sell the multi-family unit. If you don’t absolutely have to sell it in order to
qualify to buy the new house, consider getting a tenant in the unit you were
living in and keeping the whole thing as a rental. Having already been a
landlord for your neighbors, being a landlord for one more family won’t be too
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