Buying and living in a multi family unit

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bcough0121
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Buying and living in a multi family unit

Post by bcough0121 » Thu Oct 03, 2019 2:22 pm

Hello everyone, my wife and I are currently in a situation I was hoping a few of you could help us out with.

The triplex my wife and I currently live in is going up for sale at a price of $550,000. We love the place we live in and pay a very reasonable rent for the area we live in. We currently pay $1200 and the other 2 renters pay $1000 per person. So in total, the triplex brings in $3200 per month. We have lived here for 2 years and the other 2 renters have lived here for 7 each, so everyone is happy with the rental price and the house in general. I am interested in buying this place as our first rental property and want to know from people who have experience with this kind of situation.

We have $25,000 for a house down payment so this would bring the mortgage to about $525,000 with monthly payments including insurance and property taxes to about $2800. We would live in one of the units, while obviously renting out the other 2 units. So we would have an income of $2000 from the other renters, and (theoretically) have an $800 monthly payment out of our own pockets. Down the line we would want to buy another house as our primary residence and rent out the unit we move out of to net another $1200, meaning we would be profiting about $400/month from this property a few years down the road.

The real estate prices in our area have been going up dramatically in the past 10 years and don’t seem to plan on stopping (we live in an up and coming area close to a popular city in the south). So if worse comes to worse and we have to sell the house, we will most likely sell it at a profit if it came to having to sell.

Since I am new to this, I am asking:
1. Is this a good idea to continue to entertain?
2. Is this the correct way of thinking about real estate and specifically owning and living in a multi family triplex?
3. Is there any glaring mistakes or things I am overlooking here?

Thanks

stoptothink
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Re: Buying and living in a multi family unit

Post by stoptothink » Thu Oct 03, 2019 2:24 pm

You've not provided any information to determine whether or not you can afford it in the first place. If you can't afford it, whether or not it is a good opportunity is moot.

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CAsage
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Re: Buying and living in a multi family unit

Post by CAsage » Thu Oct 03, 2019 2:47 pm

I've never owned rental property, but I think this sounds like a great plan. Work out the details by sitting down with a mortgage broker to find out what the loan payments would be, the taxes, get an inspector out to see what maintenance you might be having to pay for soon. I would totally look into doing this, and as you said, in a few years, you can move on to your next home. Get some books on rental property, read more blogs on that.... and consider not letting the other two tenants know ???? It's much harder to buy rental property after you are saddled with a single family home mortgage, and right now you will qualify as owner occupied. Look hard at the numbers!
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

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FlyAF
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Re: Buying and living in a multi family unit

Post by FlyAF » Thu Oct 03, 2019 3:04 pm

With only having 25k for a down payment, you can't afford this house so it is irrelevant if it is a good deal or not.

batpot
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Re: Buying and living in a multi family unit

Post by batpot » Thu Oct 03, 2019 3:13 pm

You're putting less than 5% as a down payment. Are you sure you can afford this property?

Other considerations:
Your tax preparation will become a whole lot more complex.
You will suddenly be responsible for maintenance of 3 properties, vs zero now. You should not underestimate the time and cost this will incur.
You also need to speak with your insurance company ahead of time about doing something of a mixed policy. They can recommend the best way to proceed.

If you do proceed, definitely do not advertise to the other renters that you will be "saving" on your piece of the rent, and generally avoid any specifics about what the costs are.
Your relationship with them will be changing dramatically.

Gill
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Re: Buying and living in a multi family unit

Post by Gill » Thu Oct 03, 2019 3:17 pm

In your first post here you show income of over $60,000 combined, 24 years of age and a net worth of $40,000. There is no way whatsoever you can afford this at this point in your lives.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

stoptothink
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Re: Buying and living in a multi family unit

Post by stoptothink » Thu Oct 03, 2019 3:22 pm

Gill wrote:
Thu Oct 03, 2019 3:17 pm
In your first post here you show income of over $60,000 combined, 24 years of age and a net worth of $40,000. There is no way whatsoever you can afford this at this point in your lives.
Gill
If that is the case, there is no way they would qualify for a loan.

bloom2708
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Re: Buying and living in a multi family unit

Post by bloom2708 » Thu Oct 03, 2019 3:23 pm

Suze Orman...denied.

Keep saving and the incomes will go up. Renting is a great option.
"People want confirmation, not advice" Unknown | "We are here to provoke thoughtfulness, not agree with you" Unknown | Four words. Whole food, plant based. Bing it.

Topic Author
bcough0121
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Re: Buying and living in a multi family unit

Post by bcough0121 » Thu Oct 03, 2019 3:24 pm

Thanks everyone for your replies. To give more information about our financial situation:

- my income: $70,000/yr (possibility of 15-20k bonus)
- wife income $45,000/yr

Investments:
- across all investment accounts (401k's, Roth IRA's, HSA) we have ~$30,000

Debt:
- car loan of ~$10,000

Our annual expenses are about $48,000 or $4,000/month right now and for the past 2 years

Thanks!

Gill
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Re: Buying and living in a multi family unit

Post by Gill » Thu Oct 03, 2019 3:27 pm

bcough0121 wrote:
Thu Oct 03, 2019 3:24 pm
Thanks everyone for your replies. To give more information about our financial situation:

- my income: $70,000/yr (possibility of 15-20k bonus)
- wife income $45,000/yr

Investments:
- across all investment accounts (401k's, Roth IRA's, HSA) we have ~$30,000

Debt:
- car loan of ~$10,000

Our annual expenses are about $48,000 or $4,000/month right now and for the past 2 years

Thanks!
Thanks for the added information, but as discussed above, there is no way you can afford this building and no lender will consider giving you a loan to do it. Think of this; How do you handle the mortgage, taxes, insurance and maintenance if you have two vacancies? That's the way a bank will look at it
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

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FlyAF
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Re: Buying and living in a multi family unit

Post by FlyAF » Thu Oct 03, 2019 3:28 pm

bcough0121 wrote:
Thu Oct 03, 2019 3:24 pm
Thanks everyone for your replies. To give more information about our financial situation:

- my income: $70,000/yr (possibility of 15-20k bonus)
- wife income $45,000/yr

Investments:
- across all investment accounts (401k's, Roth IRA's, HSA) we have ~$30,000

Debt:
- car loan of ~$10,000

Our annual expenses are about $48,000 or $4,000/month right now and for the past 2 years

Thanks!
You wouldn't qualify for the mortgage so I wouldn't waste too much time thinking about it.

stoptothink
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Re: Buying and living in a multi family unit

Post by stoptothink » Thu Oct 03, 2019 3:29 pm

bcough0121 wrote:
Thu Oct 03, 2019 3:24 pm
Thanks everyone for your replies. To give more information about our financial situation:

- my income: $70,000/yr (possibility of 15-20k bonus)
- wife income $45,000/yr

Investments:
- across all investment accounts (401k's, Roth IRA's, HSA) we have ~$30,000

Debt:
- car loan of ~$10,000

Our annual expenses are about $48,000 or $4,000/month right now and for the past 2 years

Thanks!
Really doubt you'd qualify for a $525K+ mortgage based on those numbers.

Topic Author
bcough0121
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Re: Buying and living in a multi family unit

Post by bcough0121 » Thu Oct 03, 2019 3:33 pm

Got it. Thank you all for helping me out I really appreciate it. I had no idea where I stood to start going about this but you have all shown me the light.

I knew it was a stretch but I didn't really understand how much of a stretch it really was.

CMD1
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Re: Buying and living in a multi family unit

Post by CMD1 » Thu Oct 03, 2019 3:38 pm

Folks on this forum are quite conservative, generally higher income and prefer passive investments (meaning, usually negative on the subject of investment real estate). There are good points and you would want to consider carefully the risks you are taking on, BUT if you've always wanted rental property this may make sense. If there are existing renters banks will generally give you credit for 75% of the rent (25% is assumed to be vacancy, repairs etc) for your debt to income ratios, so:

$2,800 monthly payment
-1,500 75% of the 2k from the other units
= 1,300 your monthly outlay per the bank

Do you have other debt? Easier to swallow if you have no other debt (no car payments, no student loans)

This means you would need to be approved for a payment of $1,300 which is 26% of a $60k income. They may also require you to have 6 months of reserves. Definitely some risk, but perhaps opportunity if your in it for the long haul and expect your income will rise over time.

Net result of your 1,200 payment going to 800 is pretty sweet and let you bank a reserve account for vacancies.

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AerialWombat
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Re: Buying and living in a multi family unit

Post by AerialWombat » Thu Oct 03, 2019 3:45 pm

You actually might qualify for this loan, with the right lender. Whether it’s a good idea or not is a different story.

You can’t do a conventional owner occupied loan on a multi-unit property, so your only options are VA or FHA. FHA underwriting guidelines allow you to count 75% of the rent from the other two units as part of your qualifying income. There is also a self-sufficiency test for FHA triplex loans. You just need to find a lender that doesn’t put additional conditions, called overlays, on to the base FHA criteria. Check with a credit union.

I bought my duplex in 2015 on 100% VA financing. Other side paid nearly all the mortgage. Today, it’s my best cashflowing rental. One of the best financial moves I ever made.
“Life doesn’t come with a warranty.” -Michael LeBoeuf

alex_686
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Re: Buying and living in a multi family unit

Post by alex_686 » Thu Oct 03, 2019 3:49 pm

Gill wrote:
Thu Oct 03, 2019 3:17 pm
In your first post here you show income of over $60,000 combined, 24 years of age and a net worth of $40,000. There is no way whatsoever you can afford this at this point in your lives.
I will modestly take the other side. If 24 this might be a great time in their lives to take a big role of the dice. What is the worse that could happen? Failure? Foreclosure? Bankruptcy? They have little to lose and they have time to recover if things go pear shaped. If you have the temperament and a strong marriage this might be the time to take on a high risk / high return investment project.

That being said, take a look at the numbers with a cold hart. What is your expected capitalization rate? Can you kick out your friendly neighbors for non-payment of rent? What is the condition of the major mechanical like the roof and siding? Are you handy?

Gill
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Re: Buying and living in a multi family unit

Post by Gill » Thu Oct 03, 2019 3:51 pm

Although I still feel you can't afford this by any stretch, no one has yet commented on the price in relation to the rental income. With gross rental income of $38,400 and a price of $550,000 you are talking a gross return of 7% before expenses. Clearly, the property is way overpriced and by the usual rules of thumb for commercial real estate should probably be priced at more like the high $300,000 range.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

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Sandtrap
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Re: Buying and living in a multi family unit

Post by Sandtrap » Thu Oct 03, 2019 3:57 pm

Things to consider:

1. If you are living in the "triplex" and 1 renter does not pay the rent and you are in the process of eviction. And the other rental unit is vacant. Can you still pay the expenses? Mortgage, etc. (This scenario is inevitable. No if but when).

2. Will you do all of the maintenance and tenant repairs and emergencies to keep expenses down? Are you able to get up at 2:00. A.M. because the water heater is leaking in one of the units. Or, a plumbing supply line has burst under the kitchen or bathroom sink? Are you able to unplug a tenant toilet?
Because all of these expenses, if you call out for service, are going to nickel and dime you.

3. How would you feel if you rent to a nice single lady or guy and they live next door to you and their boyfriend or girlfriend visit at all hours and they play loud music and have domestic "issues"/fights that go on all night? Or, if friends park 5 cars in the driveway and they drink and party all night?

4. What would you do if a tenant fell down the stairs, maybe due to excessive drinking, and filed a lawsuit against you for damages when they fell because your stairs was not made per code. (even though it is fine)?

5. If a unit becomes vacant and is trashed, do you have the resources to restore the unit and rent it out all by yourself? Or, would you have to hire for skilled services?

6. Suppose your spouse really really really likes a tenant. But, they are late paying rent, then miss paying rent, and you have to evict them. Now what?


There are successful landlords and R/E owners who have started with this scenario you describe but they usually have considerable resources to cope with the above, and are willing to do what is needed. There is a lot more involved than what can be put on a spreadsheet or "run the numbers" that can make or break this endeavor.

Living in a rental unit complex, as an owner, is unique and has it's own "special issues" that arise. Much concerning human dynamics.

OTOH, If you can swing this and tough it out until you can purchase a home or townhouse, etc, for yourself, and then have the triplex as a full rental, and get solid financial footing, then it can be a great and awesome springboard/foundation for future financial success. Just be sure to go into it with "eyes open" and. . . . and exit plan.

*Your target should be a 10% "gross" cap rate or more.

j :happy
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Cycle
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Re: Buying and living in a multi family unit

Post by Cycle » Thu Oct 03, 2019 4:35 pm

I lived in a duplex last couple years and rented out the other half. It's the easiest landlord situation, ie being on site.

We are moving tomorrow tho to a condo and will be still managing the duplex offsite; however will now hire out lawn and snow.

I'd recommend it... Not at that price tho
Never look back unless you are planning to go that way

stuper1
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Re: Buying and living in a multi family unit

Post by stuper1 » Thu Oct 03, 2019 4:53 pm

Gill wrote:
Thu Oct 03, 2019 3:51 pm
Although I still feel you can't afford this by any stretch, no one has yet commented on the price in relation to the rental income. With gross rental income of $38,400 and a price of $550,000 you are talking a gross return of 7% before expenses. Clearly, the property is way overpriced and by the usual rules of thumb for commercial real estate should probably be priced at more like the high $300,000 range.
Gill
It's possibly a combination of the price being too high and the rents being too low. You need to compare to market rates in the area both for sales prices and rents. The tenants have gotten used to paying $1,000 a month, but similar tenants may be paying much more than that by now.

CMD1
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Re: Buying and living in a multi family unit

Post by CMD1 » Thu Oct 03, 2019 4:53 pm

Regarding price and Cap rate - without knowing what market the property is in and the goal of the OP it's hard to be judgemental. If it's in the southeast or midwest cap rate is very important. If it's in a top west coast market your likely betting on price appreciation, basing on the 1% rule or cap rates will never lead to a purchase. But even then, the appreciation rates over the last two decades in those markets....Wow.

Same goes for what kind of tenants you want to attract. The highest Cap rate properties will attract less stable tenants, more police calls etc and therefore be more hands on.

Cycle
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Re: Buying and living in a multi family unit

Post by Cycle » Thu Oct 03, 2019 5:32 pm

My duplex brings in $3150 per month and the value is like $360k
Never look back unless you are planning to go that way

WS1
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Re: Buying and living in a multi family unit

Post by WS1 » Thu Oct 03, 2019 5:52 pm

I looked into this last year and was told the following for a property requiring a jumbo loan.

Could probably do 15% down
75% of rents would be credited towards my income
6 months of PITI in accessible assets.

Check out the house hacking advocates and the Incremental Development Alliance for some relevant real world expectations.

tesuzuki2002
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Re: Buying and living in a multi family unit

Post by tesuzuki2002 » Thu Oct 03, 2019 6:12 pm

Can you afford to live in the place with out renters for a year? Not to mention when the repairs come in?

IF so then yes you can do it.

Then next question is do you want to do that?

Then go for it!!!

FI4LIFE
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Re: Buying and living in a multi family unit

Post by FI4LIFE » Thu Oct 03, 2019 6:56 pm

You've gotten a bunch of replies from people who likely have no idea what they are talking about. Between first time home buyer mortgage programs and the rental income, you might qualify for a loan.

This may or may not be a good purchase based on your local market and actual market rents. 1% rule says it's not a good buy but that is just a rule of thumb. I wish I had bought a multifamily as my first property. Do your research. Biggerpockets.com is a great resource. Bogleheads always crap on real estate investments.

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