Real estate-themed television shows have taught you to want your dream home. They’ve shown you subway tiled kitchens and bathrooms with soaking tubs. They’ve sold you on the idea that only the best is good enough. But they haven’t told you how to get there.
Outside of winning the lottery or selling the next big idea to Google, how are you supposed to afford 20% down, plus the monthly mortgage payments on your dream? Odds are, you can’t. But that doesn’t mean you have to (or should) rent forever. Instead, build the equity you need by buying a multi-unit building as your first home.
Yes, You Can Afford It
After the housing crash, mortgage requirements for investors became more onerous but if you’re planning to live in the building (making it “owner-occupied”), you will be treated as a single-family homebuyer. This means you can apply for a loan with the Federal Housing Administration (FHA).
The FHA is a government subsidized program that gives affordable loans to people who want to purchase up to a four-unit building and also live on the property. If your credit is above 580, the FHA will only require a 3.5% down payment (traditional financing usually requires at least 10%), and it will likely charge you a lower interest rate than you could get from a bank or other mortgage lender. That means buying a multi-unit property could actually require the same (or less) money up front than a single family home and you could save on your monthly mortgage payment as well.
Two, three and four-unit buildings are priced, on a per square foot basis, the same as single-family homes. So as long as you’re ok with living in tighter quarters and without the yard you’ve always dreamed of, you can probably find one of these buildings within your price range.
You’ll Build Your Savings
Another benefit to purchasing a multi-unit building? Someone else is helping to pay your mortgage. Which means every month, you’re saving more towards your dream home than you would if you’d bought the “starter home” you could afford.
Even if rent from the other units doesn’t completely cover the monthly payment, rents will continue to rise as your obligation stays the same. So at some point, the rents will not only cover the monthly payment, but they will give you passive income as well.
Once you can afford to buy another home, you can move out of your unit and rent it out, giving you even more income. Or, if you’ve decided being a landlord isn’t right for you, you can sell the building and put more money toward your dream home than you originally would have.
You Get Tax Breaks
As a landlord, you’ll get tax breaks on the rental income by writing off your mortgage interest, expenses related to maintenance, renovations and leasing, and depreciation of the asset. As a single-family homeowner, you only get a tax break on your mortgage interest up to $10,000.
You Probably Won’t Get Bad Tenants
As long as you properly vet your tenants by asking for credit reports, references, and proof of employment, you will likely get good tenants who pay their rent on time and take care of the unit. You might have heard stories of tenants who steal or deal drugs out of the unit or otherwise cause problems, but if you talk to property owners, these people are few and far between. They just make for better stories than the quiet family that brings their landlord cookies during the holidays.
You Don’t Have to Be Mr. or Ms. Fix It
It will probably help if you can make minor repairs yourself (that way you don’t have to pay for a professional every time a tenant calls), but you don’t have to know anything about plumbing, roofing, or electricity to be a landlord. You just need to have good relationships with people who can do these things.
So get recommendations from friends and family, search on Angie’s List, or contact another landlord in your area and try different people out. You want to have a professional on-call who will fix the problem efficiently and effectively while respecting your tenant’s space.
Most people wouldn’t consider purchasing a multi-unit building as their first home. But if you have enough cash to put 10% down on a single-family home, at least a 580 credit score, and you don’t mind dealing with a smaller space and a repair every now and then, it could be the best investment you ever make.