Evaluating owner-occupied multifamily home

[cosmie]

I can't seem to find much information on this, so thought I'd ask here.

When crunching the numbers on an owner-occupied multifamily home, how do you account for the owner-occupied unit? Do you ignore that fact and assume market rate for all units? If market rate for the duplex is less than you would have paid in rent otherwise, do you account for that difference in your evaluation? Does a property with an owner-occupied unit have differing "ideal" numbers from a pure investment property?

[SunshineGirl]

I'm sure others will chime in, but when I bought one, the question I asked was, "Will the rent of the tenants pay the entire mortgage, thus allowing me to live free?" That answer needed to be yes.

As I'm sure you know, a benefit of buying as an owner-occupied property is if it's four or fewer units, you'll be able to get a normal mortgage vs. income property mortgage - better rate.

[Nate R]

Does a property with an owner-occupied unit have differing "ideal" numbers from a pure investment property?

Purchased a duplex last year, moved into it from our SFH. The idea was to get us into a neighborhood we wanted to be in, and to do so without the burden of ridiculous property taxes. (The taxes on my 150K Duplex are now $4300/yr. They were $4800/yr before I appealed the assessment.) Many SFH in the area go for more, and have taxes of $4-5K/yr. I couldn't stomach the thought of paying $400/mo just for TAXES even when the house is paid off!)

So, we just made sure that if we changed our minds down the road and wanted to live elsewhere, that whatever we bought would cashflow something more than zero if we rented out both units. Because I'm not doing it soley to make money on the property, I was looking for the RIGHT property that fit our criteria. (We literally did have a list of requirments we felt were necessary.) I didn't want to add the unnecessary burden that the property also be an awesome deal if it was JUST an investment, just that it made something if needed. But I plan on staying here a while, so the main thought is that this is my HOME. So what I was really comparing was my out of pocket monthly cost to that of a single family, and then deciding if the difference was worth the hassle of a tenant, maintenance, sharing space, etc.

So, for us, we bought a duplex for 150K. Need 20% down for that these days unless you do FHA. So 120K mortgage, and add in our huge property taxes, and total payment with insurance is $970/mo, + $40/mo that I pay for the tenant's water/sewer/trash pickup. But, I get $800/mo in rent from the other unit, and we share internet. So my effective monthly cost (Obviously maintenance costs change this) is $210/mo. A comparable SFH )(Same living space) would be $130-150K in this area, and thus would cost me about $900-1000/mo. Even with maintenance, upgrades and vacancy, I expect in the long run the duplex will be worth it to us. 

Again, I'm dismissing the tax benefits of the rental income, the maintenance costs that I will incur on the other unit, etc. But the point is, I think how you look at the numbers depends on your motivation for buying a multi-family, and your plans for it long term.

[aj_yooper]

How do the tax benefits work out on an owner occupied two flat?  Would depreciation only apply to the rental unit?  Or, can you rent from yourself?  I have some interest in doing a two flat too.

[totoro]

I'm sure others will chime in, but when I bought one, the question I asked was, "Will the rent of the tenants pay the entire mortgage, thus allowing me to live free?" That answer needed to be yes.

Bingo.  That was our criteria and it took a long time to find the right place in our very expensive market.  In other markets you might even be able to make money and have a free place to live.  We are break even.

We do know that if we wish to rent out our unit we will cash flow $1600 a month.  That is nice to have as a backup if we want to travel or to increase income in early retirement before we receive our old age pension/social security.  Once the house is paid off (maybe in ten years), it will net about $4000 a month if fully rented.

We did this with two multi-families.  One in our main place of residence and the second in a vacation destination that we may retire to after the kids are finished university.  Both should be paid off by that point and our second home will net an additional $1000 while we live there. 

This creates a fully funded retirement income for us even if we never invested otherwise.  I only wish we had started this earlier - like ten years ago instead four and two respectively. 

I know it is not for everyone but it sure makes early retirement faster.

[cosmie]

I'm sure others will chime in, but when I bought one, the question I asked was, "Will the rent of the tenants pay the entire mortgage, thus allowing me to live free?" That answer needed to be yes.

When you bought it, did you intend to live in it long term? Or did you evaluate what it would do as a pure investment property (after you've moved out)?

As I'm sure you know, a benefit of buying as an owner-occupied property is if it's four or fewer units, you'll be able to get a normal mortgage vs. income property mortgage - better rate.

I knew of the benefit, just not the maximum number of units allowed. It's definitely quite useful!

Again, I'm dismissing the tax benefits of the rental income, the maintenance costs that I will incur on the other unit, etc. But the point is, I think how you look at the numbers depends on your motivation for buying a multi-family, and your plans for it long term.

True, I guess long term plans are the main reason I was curious. Living "rent/mortgage free" seems to be the guiding ethos for most people, however I've also noticed many people buying duplexes, owner-occupying for a few years, then purchasing more property and moving out. At which point it becomes purely an investment property. In that scenario, the rent-free criteria doesn't seem to be the most appropriate.

How do the tax benefits work out on an owner occupied two flat?  Would depreciation only apply to the rental unit?  Or, can you rent from yourself?  I have some interest in doing a two flat too.

AFAIK, you can only depreciate the portion of the structure that's being rented out. So if it's a duplex and you're taking one unit, you can depreciate half of it. If it's'a fourplex, you can depreciate 3/4 of it. Any expenses that are property-wide (roof, foundation, etc) follow the same principle of being split. If the expense is just for the rental (e.g., a new HVAC or appliances), then you can depreciate all of it.

[SunshineGirl]

I'm sure others will chime in, but when I bought one, the question I asked was, "Will the rent of the tenants pay the entire mortgage, thus allowing me to live free?" That answer needed to be yes.

When you bought it, did you intend to live in it long term? Or did you evaluate what it would do as a pure investment property (after you've moved out)?

Our plan was to live in it somewhat short-term, and to repeat the process over and over. But then life (pregnancy) happened and we wanted to stay in one place. But here's how our plan has played out thus far: Bought the fourplex, lived free. Bought a small single family that we lived in, with the mortgage paid from the cash flow of the fourplex. Still lived free. Got pregnant. Bought a house with a guesthouse in a great neighborhood, rented the guesthouse for about five years so we still lived free. Along the way, bought a small duplex for cash and sold the single-family and paid off the mortgage on our primary residence. We no longer rent the guesthouse, although we probably will someday. I use it as my office.

Now, unbelievably, the kids will be off in 4-5 years, so * maybe * we'll pick up with it again.