Author Topic: Live-In Rental Unit  (Read 372 times)

slowdown21

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Live-In Rental Unit
« on: August 12, 2020, 07:09:47 AM »
Hi all,

If there's another thread that covers this, please go ahead and link.

Situation
Family of 5. Currently rent a 2BR apartment in HCOL city. We have an OK savings rate (~65-70%) of income with a large chunk of that currently going towards a downpayment fund to try and stay in the city but get more space. We've been targeting savings around $140K to go towards SFH that average $600-700K.

I've recently been thinking more about pivoting to purchasing a multi-unit building and moving in. 2-3 Unit buildings cost about the same as a single family home (~$700K), and wondering how that's viewed in the forum:
-Would be able put down as low as 3.5% if I move in and live there for at least a year. The rest of the money I have already saved could go either towards the property or into a taxable account.
-If I identify the right property, renters can cover more than the unit's share of the mortgage.
-Build a higher level of equity with a smaller investment.
-Would be a landlord to 1-2 units in my building. I'm fairly handy and believe I could do a chunk of the work myself and know contractors who could do the rest.

Main Question is cash flow. I wouldn't get cash flow here, strategy would be more around the home equity for a lower initial investment. What do I need to consider in a property or in this strategy to ensure it is a good investment?

CarlosMontegro

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Re: Live-In Rental Unit
« Reply #1 on: August 12, 2020, 06:23:57 PM »
I think this is a pretty common strategy and a good one to explore.  The biggest question is if it works on a personal level for your family.

Even if you don't get positive cash flow, you're basically living rent free and someone else is accruing principal for you on your home.

SndcxxJ

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Re: Live-In Rental Unit
« Reply #2 on: August 13, 2020, 07:50:00 AM »
This is a great option to keep your housing costs down. 
Keep in mind that housing costs more than just the mortgage, here are my personal rules of thumb:
1. Repairs and up keep run about 1-1.25% of the cost of the building each year.  I am handy and do a lot myself, so budget slightly more if you sub everything out.
2.  Insurance runs about $50/month per unit.  It can get as low as $35/month per unit with larger volumes of units at one location.  It can also be slightly higher if you carry more coverage than I do.
3. If the building has any shared utilities, factor those costs in.
4. Vacancy rates are extremely tough to account for.  My area (Bay Area) is between 1-2% vacancy right now, I use 5% to be safe.  This is an area you shouldn't underestimate because vacancies can be lengthy. To calculate a monthly loss due to vacancy, reduce the rent by the vacancy percentage (example $1,000 rent would net you $950 after accounting for a 5% vacancy factor).
5. Property taxes, don't forget those.  They run approximately 1.3% the cost of the building (in my area) each year.  They vary widely, so understand property tax in your area.
6.  Lastly, consider including landscaping as a service for your tenants.  It is unlikely that tenants will do any landscaping work for their own unit, this service can run about $200/property per month.

I have lived amongst my rental units for many years now and it is great.  It takes very little time to attend to an issue at any property because they are so close.  Some people think they wouldn't want to live near their tenants, but if it is a property I wouldn't want to live at then I don't buy it.  I select tenants that are financially stable, but also someone I could live next to as a person.  It's very doable and can keep HCOL areas affordable.

Evie

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Re: Live-In Rental Unit
« Reply #3 on: August 17, 2020, 11:57:08 AM »
So we did this.  Got a much larger place than we could have if we had only looked at single family homes, and over time our rental has come to pay for most of the mortgage even though it's a smaller unit.   My advice?

If you can get a place WITHOUT shared walls do it! I want my next property to have a separate studio or granny unit.

Where I live the premium is for studios and really one bedrooms. You don't gain much by adding bigger spaces so we bought a 3-1 front house with a 1-1 back unit and I actually think we lucked out on this as it gave us more space without losing much income over what we could rent a two bedroom unit for.  I would even consider a studio instead of a one bedroom because we wouldn't even lose much since minimum rents and space are at a premium where we live.

I highly recommend getting a tax preparer/accountant who has experience dealing with rentals.  My taxes and depreciation schedules are not something I would leave to HR BLOCK and I also like having someone who if we get audited has years of experience in what is and is not allowed so I am not stuck trying to figure it out.

Only do it if you and your entire family are prepared to cover the cost yourself, and deal with the hassle of the rental.  Since you could alternatively wait a year or two and buy your own place outright, realize that if that is your end goal with the transaction costs involved you might be better off just waiting.