Author Topic: Getting a good interest rate for an "owner-occupied" duplex  (Read 9370 times)

the fixer

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Getting a good interest rate for an "owner-occupied" duplex
« on: November 26, 2013, 02:11:22 PM »
I'm starting to shop around for houses in my area to use for both rental income and a primary residence. So, basically, a duplex. I've been running the numbers on properties I'm finding and overall things look good, but I encountered a snag with qualifying for a mortgage.

I was under the impression that I could qualify for primary residence mortgages by occupying one unit of a 2-unit property. The reality of the situation seems to be a bit different. Vacancy rates are very low in the Seattle area so most duplexes are going to be occupied with tenants in both units. I can't (and don't want to) kick out a good tenant, so my plan was to just wait until one unit becomes vacant before moving into it myself. Besides, I'm also in a lease through June. I realized this morning, though, that this plan would force me to get an investment property mortgage at a higher rate and down payment because I would be unable to occupy a unit within the standard 30-60 days of closing. It's really annoying that I have not been able to get online quotes for investment property mortgages (tried Wells Fargo and a local CU site), so I don't even know how bad this situation is yet. I do know there's no way I can make this work if rates are higher than 5%.

Am I missing anything here? It seems like my choices are:
  • A higher interest rate/down payment for a property that will effectively be a primary residence within a year
  • Wait until April/May when my lease is almost up, and restrict my search to buildings with at least one vacancy (I suspect I'll only find this on properties that need significant work or are in foreclosure, and I'm a first-time buyer trying not to get in over his head)
  • Forget about duplexes and instead try to buy multiple single-family homes

KingCoin

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Re: Getting a good interest rate for an "owner-occupied" duplex
« Reply #1 on: November 26, 2013, 03:34:28 PM »

  • Forget about duplexes and instead try to buy multiple single-family homes

How do the economics of a duplex look vs single-families? All things equal, single-family homes will give you more flexibility to scale up and down.

Also, I'm surprised that this "looks good" but you're very sensitive to interest rates. Will you be able to financially handle a prolonged vacancy or drawn out eviction?

As always, concrete numbers on purchase price and rental rates are pretty necessary to making any kind of judgement.

 

the fixer

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Re: Getting a good interest rate for an "owner-occupied" duplex
« Reply #2 on: November 26, 2013, 06:14:23 PM »
Here are the numbers I'm using:

I should be able to get a duplex for about $350k, maybe less depending on the exact property I look at. The one I'm using for a hypothetical is a 4BR/2BA. Each unit is a 2BR/1BA.

Each unit should rent for about $1500/month based on my knowledge of the market. I want to live in one of them, so I ran the numbers as if I were renting the unit to myself @ $1000/month (our current housing cost). So the gross revenue from the property is essentially $2500/month. It's possible this could be lower in the short term if there are existing tenants and the seller has not been keeping up with market rates.

I assume 33% goes to expenses/vacancy. Even if I give myself no cash flow @ 100% financing (30y fixed), at a 5% interest rate I should pay no more than $312k for such a property in order to have the NOI cover the payments. But at a 4% rate the max I should pay is almost exactly $350k.

Another way to look at it: even if I put 20% down, the mortgage (principal+interest) would be a little over $1500/month. So all of the rent of the second unit goes to paying the mortgage, and I'm left to pick up all expenses on the property (about $825/month using a 33% rule). That's not saving me much on housing costs considering the ~$85k I have to put in up front plus the work I'm putting in to it by being a landlord/property manager (I know I'm building equity but I don't want to rely on it to make the numbers work, I'd rather it be icing on the cake because I don't know when/how/if I'll get it back). At a 4% rate with 20% down, the monthly payment is ~$1337 so I'm only having to set aside $825-140 = $685/month for expenses, a 17% savings. That looks much better to me, and was the reason I started looking.

Single-families won't meet our housing requirements cost-effectively unless my wife & I get roommates for the extra bedrooms. It's too much house for us. The only way it could work is if we somehow had so many rental properties that the combined cashflow paid for our housing expenses, and I don't see that happening any time soon.

MJP

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Re: Getting a good interest rate for an "owner-occupied" duplex
« Reply #3 on: December 04, 2013, 01:38:03 PM »
If you don't mind sharing, I'm curious what areas in Seattle you are looking at for this duplex.

Toddius

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Re: Getting a good interest rate for an "owner-occupied" duplex
« Reply #4 on: December 04, 2013, 05:41:52 PM »
Last year my wife and I just did exactly what you are thinking about.  We bought a triplex in Ballard  (renting two and living in the third).  Duplexes around here go for at least $500k.  So I am, also, interested in what areas you are looking in.  We do have a low vacancy rate here, but you have to be careful. 

From my experience I have the following a advice:

1.   Take your time and make sure you know what you are getting into.  We are renting our places for just under $1500.  I question if $1500 is realistic for a $350k duplex with 2bed/1bath units.  Make sure you know the market. 

2.    When we were looking the inventory was low and we were looking for a pretty specific place.  You donít want to be forced to buy a place in only the month of May.  Figure out a way to do a month to month rent at your current palce.  How long have you lived there?  If it is longer than a year, talk to your current landlord, tell them what your situation is and ask what it would take to get out of a year lease at your leisure (with notice of course).  From my experience open communication in that type of thing is a huge assets.  It took us 9 months of looking before we could move in.

3.   Aim for nicer neighborhoods.  The areas yuppies want to live, this will allow you be a lot more selective with your tenants.  We looked north of downtown.  The other reason we only looked in that area was were familiar with this part of town and that is where I work. 

4.   Stay away from single family homes - For me SFHs didn't pencil out at all (at least when we were looking), and IMO don't make sense as rentals here in Seattle.  People buy SFHs because they want the "American Dream" or that beautiful craftsman, and not because they want to save/make money. 

5.   You will need at least 20% down.  If you donít you will need a FHA loan with PMI.  When we were looking annual PMI was about 1.2% of the loan amount which killed our numbers.  They also have pretty strict requirements.   

6.   Donít worry about kicking the tenants out.  You have no idea going in if they are good tenants or not.  Many sellers wait until one unit is open before putting it on the market anyways.  This allows them to clean it up and have something solid to show without having to deal with the existing tenants.  Buying an empty place, in my experience, was an advantage.  I could ask what I wanted instead of what dealing with what the tenant was paying before, or raising the rent on them.    Also, you can be selective with who you rent to. 

7.   I found that multifamilys that were purpose built as multifamily buildings were more attractive.  Usually they are legal and do not have extra units added that they city doesnít know about. The living spaces are more comfortable too.  Also, from what I saw, less maintenance.

8.    Start talking to a realtor and a lender right away.  The lender will give you an idea of the rates and what you can get away with.  Realtors are often pretty slimy and just want to make a sell.  The smart ones will understand that you are looking for an investment and that if you are happy with the first one you will come back or refer your friends.  We had a great one, if you need a recommendation I would be happy to share his information with you. 

9.   Put together your own spreadsheet calculator and include all the possible factors.  Start running homes through it with reasonable numbers. 

10.   Most importantly do your numbers carefully.  My criteria was that the place cash flowed when it was entirely rented out (assuming you are paying market rent for the unit you live in).  Assume reasonable rents and factor in all your costs, I assumed 1 to 2 % of the houses value annually for maintenance (depending on condition), 5% vacancy, WSG, insurance, and taxes.  Make sure if there are repairs needed that you have cash after the purchase to do them.  I found that the 50/2 rule or the other rules out there didnít work out so well here in Seattle.  I think this is because the land value here is so high which throws off the ratios.  These are just ball park estimates anyways.  Do the numbers yourself.

Maybe a little long winded, but this is just my two cents.  So far we are doing great.  Rents are going up we have better deal than expected.

Good luck and be careful.     

« Last Edit: December 04, 2013, 05:43:30 PM by Toddius »

slugsworth

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Re: Getting a good interest rate for an "owner-occupied" duplex
« Reply #5 on: March 05, 2014, 12:31:14 PM »
I know that this is a 3-mo old thread, but I was curious how it turned out. I own a single family house and have an opportunity to purchase a lot next door, tear down the existing structure and build a duplex or two townhomes. I was considering renting out my house (it would be cash flow positive) and moving into the one of the new units. Another option is I could sell the 2nd townhouse

I need to do some analysis, particularly on the cost to build, but I would be interested to hear how other people in Seattle have made out.

the fixer

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Re: Getting a good interest rate for an "owner-occupied" duplex
« Reply #6 on: March 05, 2014, 05:07:04 PM »
I gave up on the idea, but am starting to consider again. We'll see what I can find this summer.

Problem is we're in a pretty inflexible rent situation right now. The building management won't even let us switch units mid-lease! We also don't have a month-to-month stipulation, we'll have to see if they let us do it for the summer (at the very least, we definitely need to stop moving in July, the rental market is insane at that time).

The biggest problem I'd face is cash on hand. If I'm looking at $500k for a duplex, 20% down payment is $100k. Plus I'd need some money set aside for repairs and closing costs. My wife and I could come up with that, but this amount would be a third of our net worth at the moment, and would require liquidating most of our taxable accounts. That's not a very diversified way to add RE to one's portfolio!

I forget where I saw that duplex for $350k, I know there was one in Columbia City I was looking at (it had a weird-shaped lot though). The area I'm interested in is the Beacon Hill/North Beacon Hill/Columbia City area. It's much more affordable than the yuppie places like Ballard, Capitol Hill, Queen Anne, etc. 1BRs were renting at about $1100/month, or a bit more last summer.

slugsworth

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Re: Getting a good interest rate for an "owner-occupied" duplex
« Reply #7 on: March 05, 2014, 05:35:08 PM »
Thanks for the update. I took a look at the CMLS today and had a hard time finding much that was much under $200k/unit.  That being said, I would love to have a beer with you and Toddius and talk through the possibilities. 

the fixer

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Re: Getting a good interest rate for an "owner-occupied" duplex
« Reply #8 on: March 06, 2014, 09:56:18 AM »
That would be cool with me too... I'm really new to all this and don't know what I don't know, which is really scary when you're talking about sinking $100k into a single leveraged asset!

From playing around on Zillow it looks like $500k is a doable wholesale price on multifamily buildings in the university district or Greenlake; there are 2-3 available for about 20% above that. There's also a really nice one in Capitol Hill retailing for $450k, but it's a corner lot :(

Toddius

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Re: Getting a good interest rate for an "owner-occupied" duplex
« Reply #9 on: March 06, 2014, 10:02:03 AM »
I would be up for a beer. 

the fixer

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Re: Getting a good interest rate for an "owner-occupied" duplex
« Reply #10 on: March 10, 2014, 12:11:15 PM »
Okay, I feel like I've jumped in the deep end in the past week and am learning a ton about researching rentals and building offers the seller might accept. I think I've got enough experience now to answer my own question!

I'm in the exact situation I predicted above with a duplex I'm looking at: I want to owner-occupy for a variety of very good reasons but both units are rented out. The first lease is up in September. I have two proposals for how I can still secure an owner-occupied mortgage on this property:
  • Secure seller financing of some kind on a temporary basis until August/September, then get a bank mortgage once I'll be able to move in to one unit. This might get complicated if the bank will consider this a refinance, I'm still looking into the details.
  • Pay off the tenants in one unit to end their lease early. In my case the tenants are college students, so I'm betting that I can buy them off easily to get them to move out at the end of the semester after finals. I came up with this one last night, and it's definitely my preferred option.

slugsworth

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Re: Getting a good interest rate for an "owner-occupied" duplex
« Reply #11 on: March 10, 2014, 12:14:25 PM »
Seattle has some specific landlord tenant requirements re: relocation. Have you talked with your lender regarding what they require as far as occupancy, it may have some leeway.

the fixer

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Re: Getting a good interest rate for an "owner-occupied" duplex
« Reply #12 on: March 10, 2014, 12:42:18 PM »
I just asked them this morning, haven't heard back. We were reading over the weekend about what we're legally required to do re the tenants, and the owner intending to occupy a unit in a dwelling for themselves constitutes just cause for eviction (SMC 22.206.160.C.1.e). I don't want to be a dick, though. It should be easy enough for me to make this somewhat convenient for them and compensate them for their trouble.