It’s not easy to purchase a home, so here’s a suggestion that may be surprising: Instead of buying one residence, buy several. What I’m suggesting has nothing to do with late night infomercials or books that promise fast and easy wealth from real estate. Instead, many buyers can benefit from an interesting option in the mortgage system.
When you hear people talk about “real estate financing” they generally divide mortgages into two categories; mortgages for owner-occupied and more expensive and tougher mortgages for investors.
“Investment financing” is for buyers who do not physically reside at a property. “Owner-occupied” mortgages are for your primary residence.
But there’s another option:
Owner-occupied financing with little down and low rates is typically available for the purchase of more than a single-family house. Normally you can get owner-occupied financing for properties with one-to-four units as long as you use one as your prime residence.
In other words, your status as an owner-occupied allows you to buy more than just a house or condo. You can actually buy property that produces rent and increases your tax deductions.
When you buy properties with two-to-four units the world of real estate financing changes. Lenders will apply most of the rent to your income for qualification purposes. This means you can borrow more — and also that you can offset mortgage costs with the rents such properties produce.
Suppose you buy a property with four units. You’ll live in one and rent the others. Each of the three rental units has a fair market rental of $1,000.
In this situation you’re likely to get two benefits. First, the lender will count some portion of the rent — say three-quarters — as income for you when determining your qualification standards. In other words, $2,250 a month will be added to your income. ($1,000 x 3 units = $3,000. $3,000 x 75% = $2,250)
Why $2,250 and not the whole $3,000? Because the lender assumes you’ll have vacancies, repairs, insurance, taxes and other costs for the rental units.
Buying two-, three- and four-unit properties can make great sense, especially for first-time buyers. You’ll have “help” meeting monthly mortgage payments, especially in the first few years of ownership — the time that’s often the most difficult. Later on, if you elect to move you can sell the property or you might choose to keep it and just rent out the unit that had been your residence.
As with all investments, neither annual income nor rising property values can be guaranteed. Some owners may feel uncomfortable having tenants so close and there’s always the potential for insufficient rents, excess vacancies and big repairs.
Also, beware of going too far. While up to four units is okay, five units automatically classifies the property as “investment” real estate under the guidelines for most mortgage programs, a title which means you cannot use owner-occupied financing even if you live on the property.
The good news, though, it that as an owner/occupied and also as a landlord you’ll learn a lot about the practicalities of real estate investing.
Real estate ownership requires ongoing maintenance and oversight. As an owner-occupied with a few units, you’ll learn “on the job” about making repairs, dealing with tenants, hiring contractors and maintaining property. These are valuable lessons which can provide income and wealth over a lifetime. In fact, many people who’ve become successful in real estate often started with just one small property, owner-occupied financing with little down — and two to four units.
For details, speak with appropriate professionals. The Financial Forum can tell you about available financing; real estate brokers can provide information regarding local rental patterns plus you’ll want an accountant to explain the tax benefits of multi-unit ownership.
VERICO The Financial Forum Ltd.
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