Author Topic: Real estate and relationship question  (Read 3805 times)

adwel81

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Real estate and relationship question
« on: March 26, 2014, 07:44:21 AM »
I have a mixed real estate and relationship question for the Mustachians. As you all know, there’s very limited real estate inventory in many parts of the country. I’ve been watching the market in my area 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) 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.

socaso

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Re: Real estate and relationship question
« Reply #1 on: March 26, 2014, 11:06:21 AM »
I don't think it is less smart to buy a single family home but since you are not married and it sound like you currently have no children this is a great time to build your investment portfolio so I would want the first scenario. If you think children might be in the cards for you at some point then you may choose to go single family at that time and rent out all units in your other properties. Then won't you be happy to have all that rental income!

Thegoblinchief

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Re: Real estate and relationship question
« Reply #2 on: March 26, 2014, 11:13:07 AM »
How small are we talking? (Tiny houser here.)

I would lean towards staying in the existing situation until you have enough to purchase a suitable duplex. Be patient. Maybe it won't take as long as you think for something interesting to appear on the market.

A duplex can help defray a lot of the cost of ownership, while often feeling much like a single family home, especially if there's a nice yard.

adwel81

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Re: Real estate and relationship question
« Reply #3 on: March 26, 2014, 11:39:50 AM »
We're in about 600 sq ft now, with some space dedicated to my yoga space (no furniture allowed), plants, many bikes, and outdoor gear. I'm also paying for a storage unit - Nearly all of my furniture, pictures, off-season clothes/gear are in storage, as there is no additional room in our apartment and the 1800s basement is practically inaccessible.

I'd be happy with about 1,000 square feet - not anything giant, but not cramped. What's really driving the need to move to a different place (or improve this one) is a lack of sunlight and warmth - my previous apartment was very sunny and warm, and I really miss that.

Yes, waiting longer until I have more $$ makes sense, but knowing that prices and interest rates are rising make me want to do something before the fall. Just trying to get a sense of what the better "backup" plan is - Settle on an SF but make it a primary residence, or go for a rental-quality investment property and renovate our current place into something it's not (i.e., it works well as a MF; takes more $$ to convert to something else).

I'm also fairly highly taxed - I have practically no deductions, and just take the standard deduction. Eager to come up with a strategy that minimizes my effective tax rate.

SDREMNGR

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Re: Real estate and relationship question
« Reply #4 on: March 26, 2014, 12:25:47 PM »
Without seeing the 4 plex, I'd be very cautious about turning 2 units into 1.  If it's a rental, I would highly doubt you'd get more from the 1 large unit vs. the 2 smaller.  And if it's for personal living space, I'd highly recommend going for a SFR over the communal living.  It's personal preference, but as your wealth increases and your ability to pay additional for your housing increases, I'd say privacy and freedom (isn't that what FIRE is all about? ) needs will increase.  I'm all for living frugally and simply but having to listen to a neighbor blasting music at 2 am gets old.  Personal preferences I guess but I would much rather use the extra income from the 4-plex to get a decent SFR that you actually enjoy living in, and if you want, you could rent out a room or get one with a granny flat.

The duplex option doesn't seem so bad, and you'd get half the tax benefits so that's good. 

the fixer

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Re: Real estate and relationship question
« Reply #5 on: March 26, 2014, 03:25:40 PM »
Are multifamily properties in your area at least good investments? What do the numbers look like?

I say if it's just a problem of not having a large enough down payment, save some more. It shouldn't take more than a year to have enough, right? Alternatively, you can use an FHA loan to purchase a property with lower down payment, although PMI will make it tougher to build a good cashflowing property. A third option is a Homepath loan if you can find a Fannie owned property, which won't require PMI.

I would only switch to looking at SFRs if multifamilies are a bad investment period. In my experience, owning a primary residence is not cheaper in the short run unless you can score a wholesale price. Your market conditions may vary of course.

Thegoblinchief

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Re: Real estate and relationship question
« Reply #6 on: March 27, 2014, 11:34:59 AM »
We're in about 600 sq ft now, with some space dedicated to my yoga space (no furniture allowed), plants, many bikes, and outdoor gear. I'm also paying for a storage unit - Nearly all of my furniture, pictures, off-season clothes/gear are in storage, as there is no additional room in our apartment and the 1800s basement is practically inaccessible.

I'd be happy with about 1,000 square feet - not anything giant, but not cramped. What's really driving the need to move to a different place (or improve this one) is a lack of sunlight and warmth - my previous apartment was very sunny and warm, and I really miss that.

Yes, waiting longer until I have more $$ makes sense, but knowing that prices and interest rates are rising make me want to do something before the fall. Just trying to get a sense of what the better "backup" plan is - Settle on an SF but make it a primary residence, or go for a rental-quality investment property and renovate our current place into something it's not (i.e., it works well as a MF; takes more $$ to convert to something else).

I'm also fairly highly taxed - I have practically no deductions, and just take the standard deduction. Eager to come up with a strategy that minimizes my effective tax rate.

Never buy a house just to reduce taxes. That said, if you simply can't wait until you have enough to buy a "livable" duplex, I'd buy a SF and use it as your primary residence.

Have you tried reorganizing your space? We have rearranged our main living space about 10 times in 7 years. Each change makes it better. Lack of storage is challenging, but make sure it is a true lack of space, and not an excess of crap.

TrMama

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Re: Real estate and relationship question
« Reply #7 on: March 27, 2014, 11:49:37 AM »
What about buying a larger SF and converting part of it into a rental suite? This is what a lot of Canadians do since a SF home is generally less expensive than a SF home with a suite, when everything else is equal. Renters here don't have any qualms about renting a suite, I don't think this is the case everywhere though.

We were also comfortable with a larger mortgage since we had rental income coming in.

Being Canadian, I have no idea about US taxes.

ingrownstudentloans

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Re: Real estate and relationship question
« Reply #8 on: March 27, 2014, 12:01:16 PM »
have you thought about a SF that your SO rents part of.  You would have to run it by a tax guy/gal, but I am pretty sure you can get the tax advantages of a MF rental property, depreciate 1/2 of 1/27 of the property, write off 1/2 of utilities (if you pay for 100% of them) etc...just a thought that seems to take care of all of your concerns and would let you grow with the house later on if you get married/have kids and want to stay there.

Villanelle

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Re: Real estate and relationship question
« Reply #9 on: March 27, 2014, 12:08:56 PM »
Instead of a duplex, can you find a SFH that has a small rental apartment in the basement (or otherwise sectioned off)?

Personally, I'd be concerned about so much mixing of finances and properties and incomes with someone to whom I'm not married, but that a relationship question to ask yourself. 

Daleth

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Re: Real estate and relationship question
« Reply #10 on: March 29, 2014, 10:01:33 AM »
Instead of a duplex, can you find a SFH that has a small rental apartment in the basement (or otherwise sectioned off)?

Yes. Look for the phrase "mother in law suite." Or since that's not always easy to search for on realtor websites (unlike true multi-units which most sites are set up to let you search for), maybe sign up with a good buyer's agent and let him/her know what you're looking for (i.e. either a duplex or SFR with MIL suite).

Personally, I'd be concerned about so much mixing of finances and properties and incomes with someone to whom I'm not married, but that a relationship question to ask yourself.

Ditto.