Hi - I originally posted this in "Ask a Mustachian" but it may be more appropriate for this thread.
There’s very limited real estate inventory in my part of the country (Northeast). I’ve been watching the market in my small city for ~9 months, looking for a perfect duplex that could be owner-occupied with a single small rental unit. But, I haven’t seen anything that meets my criteria (minimum square footage and quality to be owner-occupied by two people) and budget.
Enter the relationship dimension and two potential options:
Relationship dimension: My significant other – we are not married – owns a four-unit rental property that’s in a good location, has a low interest rate, and is generally something we both agree he/we should hold onto. However, all four units are quite small and not in ideal condition, and therefore we would not want to live in one of them long term (though we’ve done it for the past 4 months). If we were going to live here, we’d want to convert two units into one, which would be a fairl expensive project (at least $60k).
I am sitting on a 20% downpayment-sized chunk of savings, which we are hoping to use to buy another property to live in. It would be my first home purchase. Right now it looks like it’s enough for a single-family, but not necessarily a duplex or multifamily that would be large enough/nice enough to move into right way (difference of $80-90k). However, we both agree that if possible, it’s preferable to get a multifamily over a single-family, for the rental income and potential tax benefits (feel free to chime in if you disagree). My other assumption is that the tax benefits of occupying your primary residence outweigh the tax benefits of owning a pure investment property that you rent out.
The ideal scenario, in my mind, is:
1. Find a duplex that I can purchase for 20% down, that has a unit that is large enough for us to live in comfortably. Leave my partner’s multifamily unit unchanged, and altogether, we receive rental income from 5 units. His property changes to investment status and mine is primary residence.
This scenario is looking unlikely given where multifamily prices are.
Alternative scenarios are:
2. Find a single-family that I can purchase for 20% down and we live in. I don’t receive any investment income and we have to “work out” a fair balance of payments between us. At some point in the future, we could choose to rent out the single-family and renovate two units in my partner’s property to one large, nice unit (we both want to do this at some point because it has great southern exposure)
3. Find a rental-quality property (single family or duplex) that I can purchase for 20-25% down (I think the dp requirement may be higher for investment properties), and it immediately becomes an investment property. We develop plans to convert two units in my partner’s building into one unit, and finance renovation with a home equity loan, since I won’t have much (any) cash left after purchasing an investment property.
I guess my questions are:
a) How much less “smart” is it to buy a single-family rather than a multifamily?
b) How about the decision to own property that’s your primary residence versus owning ONLY an investment property (and someone else owns your primary residence)?
I think it may come down to tax differences – if you have any tips or resources for figuring out what the difference is, please let me know.
