Author Topic: More buying multi-family home and living there questions  (Read 8085 times)

Effort_to_Stach

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More buying multi-family home and living there questions
« on: February 02, 2014, 04:00:09 PM »
I haven't done a lot of research on this yet so bear with me. Any thoughts are greatly appreciated!

I am currently renting one of the units in a large house that is split into 3 units. The landlord doesn't live in any of the units and has recently moved out of town and put the property up for sale. The price is set up such that a 15 year fixed loan at 4.5% would be just slightly more than my current rent for one unit. This does not include any taxes or insurance. I believe the other units rent for the same price or very close to it.

On face value this seems like a good opportunity to explore further. My concern is that I have never purchased a house before and am perfectly content to keep renting for the time being, so buying my first home and adding in the rental unit factor scares me a bit.

The other side of the coin is that I don't want to let a good opportunity pass me up and my career and financial lives are stable and I plan to stay in the area for 6+ years. I would probably move out of the unit within 2 years and purchase my own home.

I did see in another thread that less than four units is good as it lets me get a personal mortgage.

My initial concerns are with additional insurance that is needed for rentals and tax implications. Any thoughts at all are awesome. What types of questions should I be asking if I move forward. What types of professionals should I seek out with questions (real estate agent, tax professional, lawyer?)

Thanks!

mom2_3Hs

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Re: More buying multi-family home and living there questions
« Reply #1 on: February 02, 2014, 08:41:22 PM »
We own a multi-unit and live in it.  It was four units when we bought it.  It was in terrible condition, so we gutted it, put back the 3 bedroom apt upstairs, and rotated which part we lived in.  For a while we rented two and lived in one, but as our family has grown, we've taken over the three one bedrooms to make a four bedroom for ourselves.  It has worked out very well for us; the rent collected has paid the mortgage or for major rennovations (think sidewalks and retaining wall for a large corner lot house) every year.  Our insurance is close to the same as if we just had a single home since we live in it.  Our property taxes are slightly higher (IN has different max rates for single dwelling vs. apt units), but not ridiculous.  However, depending on where you live, ymmv, so you should shop around for insurance with several insurance agents and check on property taxes (usually at the courthouse, but the dept will depend upon your state's system) BEFORE you buy.    I work at a college, and we've been able to handpick the tenants, and other than last year, we've had really good ones.  What do you think of the other tenants?  Do you think they would stay? 

The other thing is that your timeline is pretty short.  Technically we are still "losing" money on the house because of depreciation on rennovations we've done.  I will say that our taxes are significantly more complicated now, though Turbotax does a good job of keeping track of the depreciation for us.


Effort_to_Stach

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Re: More buying multi-family home and living there questions
« Reply #2 on: February 03, 2014, 10:23:38 AM »
The tenants are pretty good. One has been there with 2+ years with no plans of leaving. The other I am not sure. It is near a college so I don't think I'll have too much trouble. I assume the current tenants payment history is something I can ask for as a prospective buyer?

SunshineGirl

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Re: More buying multi-family home and living there questions
« Reply #3 on: February 03, 2014, 11:02:37 AM »
On the surface, it looks like a potentially very good deal for you.

bearman

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Re: More buying multi-family home and living there questions
« Reply #4 on: February 03, 2014, 12:51:57 PM »
I did basically this same thing through my 20s, and I can tell you it has the potential to really make a big difference for you financially (versus continuing to rent or buying a house). You should familiarize yourself with the key rental metrics and run your numbers through there (there is a sticky thread in this section of the forum with some good books). I'd suggest calling your county and getting a property tax estimate, explaining that you will be an owner-occupant. Because the current owner doesn't live there, he likely pays more tax than you would as an owner-occupant. By living there, you'll also get a better interest rate on your mortgage. I'd also suggest getting an insurance quote. Again, explain you are an owner-occupant. Assuming the property has fairly recent electrical and the necessary safety items (smoke detector, fire extinguisher, etc), the insurance cost shouldn't be much more than a single-family home. Beyond that, maintenance / renovation will be your main costs. I would suggest really thinking critically about this. With 3 units, you can easily have a string of ovens, fridges, a/c units, etc, that eat up your money. However, that shouldn't happen every year :) Once you have the building optimized (updated to the point where you meaningfully maximize revenue), it can be a wonderful passive income stream. Though it has its downsides (tenants "stopping by" / you being "on site" all the time), it is very easy to step away from it in the future, while the income / equity continues to build. If you are willing to stay on top of the work and the numbers make sense, I would say go for it.

Effort_to_Stach

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Re: More buying multi-family home and living there questions
« Reply #5 on: February 03, 2014, 03:21:48 PM »
Thanks for the info everyone. I do know that the hot water heaters and heating system was updated recently. The repairs seemed to be kept up good while the landlord lived here locally and have slacked a bit since he moved out of the area. This is another possibility for increased value as I think some basic upgrades could allow me to up the rent a bit and add value to the property at the same time.

I like the idea of getting insurance quotes and property tax estimates. It seems that my first step is to go into a bank and make sure I am qualified for the amount I need. The loan is another bit of a concern. Since I have just moved and paid cash for a car I don't have but about 5% I could put down on the loan, especially since I am wanting to keep a decent cash reserve for any services that may pop up on the property.

Obviously, I'll ask the same questions at the bank but if anybody wants to chime in with thoughts that would be good too.

I will be sure to keep updated as this goes along.

SunshineGirl

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Re: More buying multi-family home and living there questions
« Reply #6 on: February 03, 2014, 03:38:02 PM »
It sounds like he's got it listed through a realtor?

You may want to give him a call and talk with him. I would circumvent the realtor and go to him directly and tell him you're thinking about putting in an offer. He might very helpful in providing information about the property, and he might tell you what he's "hoping to get" for the property. In other words, he might give you special consideration.

If you have enough cash to put down 20% and avoid PMI, that would be ideal. You should be able to build your savings back up quickly, because your living expenses will go down.

Also, push for a good deal now - "you make your money going in." And hire an inspector and make sure you get the place inspected. There will be issues - expect that - but you'll want to know any deal-breakers. In your offer, you might want to give the price you're offering and add something like "seller will provide up to $XX credit for repairs to be paid at closing, based on inspection report." This makes it easy for the seller to know the exact dollar amount he's working with and allows you to do, or not do, the repairs yourself, and get a little cash back at closing. If you say $1000 for repairs, and the inspection comes back at $2000 worth, you'd then cough up the difference as you do the repairs, OR you have a period in which to back out of the deal.

Nate R

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Re: More buying multi-family home and living there questions
« Reply #7 on: February 04, 2014, 08:37:29 AM »
AFAIK: A standard conforming loan now requires 20% down for 2-4 units, even owner occupied. (I had to pay 20% down on my duplex last year.) FHA loans I think you can still do the 3.5% down, but then there's PMI and higher fees.

RaveOregon

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Re: More buying multi-family home and living there questions
« Reply #8 on: February 04, 2014, 12:45:50 PM »
I just closed on a 3 family owner occupied, and I managed to find a 10% down deal, but it was hard to do. No major bank will do it anymore, I had to check with my local banks and only one of them would.

Nate R

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Re: More buying multi-family home and living there questions
« Reply #9 on: February 05, 2014, 08:46:07 AM »
I just closed on a 3 family owner occupied, and I managed to find a 10% down deal, but it was hard to do. No major bank will do it anymore, I had to check with my local banks and only one of them would.


Yep. My local credit union would do 15% down on a duplex. I just know the Fannie/Freddy requirements are now 20% down on multifamily properties.

swimmer21

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Re: More buying multi-family home and living there questions
« Reply #10 on: February 06, 2014, 12:14:48 PM »
I've been looking into this a lot myself recently.

It's pretty easy to find non-FHA loans for an owner occupied duplex with less than 20% down, sometimes as low as 10%, but 15% is more typical.

However, on a 3-4 bedroom, most lenders treat it as an investment property, and want 20 or 25% down.

Mori

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Re: More buying multi-family home and living there questions
« Reply #11 on: February 07, 2014, 01:39:26 PM »
I'm not sure on the loan part, but with less than 20% you'll probably have to escrow taxes and insurance in addition to PMI. Make sure you look at the local revenue page for the house and see how much taxes were. You can get an insurance estimate by filling out one of those online applications, so you could get a better idea of the insurance costs (or if they will cover your house--my house, solid brick, is not covered by some insurers because it costs more to rebuild than it's worth).

I like this calculator to estimate monthly payments with everything but PMI included:

http://www.realestateabc.com/calculators/PITI.htm

And then add in your estimate for repairs per year. There are some other topics with good calculations on that.

Effort_to_Stach

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Re: More buying multi-family home and living there questions
« Reply #12 on: February 07, 2014, 04:01:32 PM »
Thanks for the great comments from everyone. I've been busy with work this week and a big snowstorm. I think I am going to have to go the FHA route. I'm hoping that it I'll be able to refinance or at least get rid of the PMI within a year by having the loan paid over 20% by then.

I have learned what the other tenants are paying monthly. Hopefully at some point next week I will have the taxes and insurance information and I will post all of the numbers together to see how things stack up.


Mori

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Re: More buying multi-family home and living there questions
« Reply #13 on: February 07, 2014, 05:09:13 PM »
You'll want to confirm with your lender, but I believe PMI can no longer be removed on FHA loans that start with >90% LTV, and it's some ridiculously long time if you have <90%. So you'd have to refinance to get out of it.

Effort_to_Stach

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Re: More buying multi-family home and living there questions
« Reply #14 on: February 09, 2014, 12:32:23 PM »
Well I have done a bit of FHA research after Mori's post and he appears to be completely correct. This is what I have found.

http://www.fha.com/fha_requirements_mortgage_insurance





So depending on whether I do 3.5% down payment or 10.01% down I am looking at 11 years vs. lifetime and 45bps vs. 70bps (which if I understand this correctly is an extra 0.45% or 0.7% on the loan payments.)

I still need to gather more info and run some scenarios but thought this info might be helpful for others that are considering an FHA loan.

Edit to add: there is also an upfront payment of 1.75% for FHA no matter what the LTV%
« Last Edit: February 09, 2014, 12:37:48 PM by Effort_to_Stach »

Nate R

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Re: More buying multi-family home and living there questions
« Reply #15 on: February 12, 2014, 11:10:56 AM »
Curious how the possibility of an FHA loan affects your overall numbers on this place....please keep up posted!

Effort_to_Stach

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Re: More buying multi-family home and living there questions
« Reply #16 on: February 12, 2014, 03:52:58 PM »
Well I'm still hammering out the final numbers. But I have some to work with. First thing the mortgage banker did was put in for a conventional. With my 691 credit score they came back that it would require 25% down. From the comments here it sounds like I could shop around and possibly get 20% or 15 if I'm lucky. So this pushes my back towards FHA:

Details:

100 year old house. 3100sq ft. 3 units each of which are 2bd/1ba.
Listed for $55,000
Me and another tenant pay $425/mo and the other which has been there a few years pays $400. The plan was to bump that unit up to 425 when they move out.

The current numbers he gave me on FHA look like this:

4.5% interest
$265.66 principle and interest
$59.25  pmi
$63.26  monthly taxes
$75.00 estimated monthly insurance
 
$463.16 total monthly payment, depending on what your actual insurance amount is.

I have emailed back to ask what the exact loan amount this is based on and a good faith estimate of closing costs. I have also told him that I would like to do 10% down so that the bps will drop down to 45 to see what that will do to the PMI.


My current thoughts are to put in a low offer to offset the cost of the FHA loan (assuming inspection and everything goes well. I was thinking perhaps 48K. I know the seller is motivated and I'm not in a position where if the deal falls through then I'm worried. I am still happy with my current renting situation.

So I am happy to get everyone's thoughts on this. It still falls well below the 1% rule so does it still look like a decent deal?

Nate R

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Re: More buying multi-family home and living there questions
« Reply #17 on: February 13, 2014, 08:55:02 AM »
I'm not VERY experienced in deal analysis strictly from a cashflow only perspective, but for a situation you plan to live in, sounds reasonable to me, depending on condition. And looks to me that it would make enough money if you kept it if/when you decide to move on. Not sure how nice the area is, or how hard it is to find tenants. But if it were me, I'd raise the rent on the $400 tenant.  If they move, fine, gives you a chance to update/clean up the unit.
Either way, they're not paying market, and the other units are rented for $425, seems like market will bear $425.

Daleth

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Re: More buying multi-family home and living there questions
« Reply #18 on: February 13, 2014, 09:46:19 AM »
Well I'm still hammering out the final numbers. But I have some to work with. First thing the mortgage banker did was put in for a conventional. With my 691 credit score they came back that it would require 25% down. From the comments here it sounds like I could shop around and possibly get 20% or 15 if I'm lucky. So this pushes my back towards FHA:

Details:

100 year old house. 3100sq ft. 3 units each of which are 2bd/1ba.
Listed for $55,000
Me and another tenant pay $425/mo and the other which has been there a few years pays $400. The plan was to bump that unit up to 425 when they move out.

The current numbers he gave me on FHA look like this:

4.5% interest
$265.66 principle and interest
$59.25  pmi
$63.26  monthly taxes
$75.00 estimated monthly insurance
 
$463.16 total monthly payment, depending on what your actual insurance amount is.

I have emailed back to ask what the exact loan amount this is based on and a good faith estimate of closing costs. I have also told him that I would like to do 10% down so that the bps will drop down to 45 to see what that will do to the PMI.


My current thoughts are to put in a low offer to offset the cost of the FHA loan (assuming inspection and everything goes well. I was thinking perhaps 48K. I know the seller is motivated and I'm not in a position where if the deal falls through then I'm worried. I am still happy with my current renting situation.

So I am happy to get everyone's thoughts on this. It still falls well below the 1% rule so does it still look like a decent deal?

The 1% rule states that if you're buying an investment property for $55,000, you need to be able to rent it out for at least $550/mo (1% of the purchase price). If you need to do repairs then the 1% applies to the total price ($55k + cost of repairs). This house is GOLDEN as far as that rule goes, because it's $55k and the two units you won't be living in rent for a total of $825/mo! That's 1.5%, well in excess of the "at least 1%" rule.

To me this looks like an amazing opportunity. I would jump on it. You will need a much larger down payment than you would on a single-family residence, but look at it this way--say you need 20% down:

- 20% down on $55k is $11,000

- You'll also need somewhere around 5%-7% to cover closing costs, so that's another $2750-$3850. Let's use the highest number just to be conservative: this means your total investment is $14,850. The list price of the house is not an investment you're making because it's not coming out of your pocket--your tenants will be paying for the entire mortgage, and then some (mortgage, taxes, insurance and a nice profit too). In other words your tenants are buying this house for you.

- Even without raising the rent on the $400/mo guy, you're still bringing in $825/mo, or $9900/year. So your annual return ($9900) on your investment ($14,850) is a mind-boggling 66%. AND you're getting other people to buy a house for you, so you have a free place to live!

See, this is the beauty of rental real estate. Aaaah. Lovely, isnt' it?

SunshineGirl

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Re: More buying multi-family home and living there questions
« Reply #19 on: February 13, 2014, 10:47:43 AM »
Actually, as I look at these numbers, one approach might be to put absolutely as little down as possible, since your tenants are the ones making the payments. This would allow you to have cash available for other things.

I bought a fourplex 18-ish years ago that was FHA (but didn't FHA used to offer much better terms?) and I put down $3K on a $132,000 price, lived there "free" for awhile while the tenants paid the mortgage and then some. My return on the initial $3K annually was/is 200%+.

So sure, offer a low price; that's a great idea. But if he balks, even at full price this is a really good situation for you. 

Daleth

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Re: More buying multi-family home and living there questions
« Reply #20 on: February 13, 2014, 11:50:55 AM »
Actually, as I look at these numbers, one approach might be to put absolutely as little down as possible, since your tenants are the ones making the payments. This would allow you to have cash available for other things.

I bought a fourplex 18-ish years ago that was FHA (but didn't FHA used to offer much better terms?) and I put down $3K on a $132,000 price, lived there "free" for awhile while the tenants paid the mortgage and then some. My return on the initial $3K annually was/is 200%+.

So sure, offer a low price; that's a great idea. But if he balks, even at full price this is a really good situation for you.

That would be awesome if possible, but some shopping around would be needed. Local banks and credit unions are your best bet, and even they might not be able to allow an actual LOW down payment. It's worth asking but major banks will want 20%-25% and local banks might be able to get to 15%. If they can get lower, great, but remember PMI is an unbelievable waste of money and PITA.

Mori

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Re: More buying multi-family home and living there questions
« Reply #21 on: February 13, 2014, 02:38:11 PM »
I forgot to ask--this house, is everything FULLY split? By that I mean 3 diff electric meters, water meters, etc?

Effort_to_Stach

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Re: More buying multi-family home and living there questions
« Reply #22 on: February 13, 2014, 05:56:42 PM »
Yes everything is split.

I did remember that the current landlord pays the trash/sewer bill. This may be considered as a single residence for this bill. I need to find that out and figure it into the numbers as well.

SunshineGirl

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Re: More buying multi-family home and living there questions
« Reply #23 on: February 14, 2014, 07:01:07 AM »
OK, so let's all brainstorm on how the OP can avoid PMI. You should be able to pay this mortgage off quickly if you wish, but...can you sell some things? Your car? Your first-born? Will you be getting a tax refund?

How much do you have and how much do you need to avoid PMI? In terms of dollars, and let's assume you get it for $50K. You'd need $10K. How short are you?

Have you talked with the owner about the possibility of owner financing?

Mori

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Re: More buying multi-family home and living there questions
« Reply #24 on: February 18, 2014, 08:21:54 AM »
EtS, I think this sounds like a good deal. I'm actually looking for rental property (I just rent rooms in my house right now) and barring any horrible defects, this is one I'd jump on. Maybe arebelspy can jump in and offer some commentary.

OK, so let's all brainstorm on how the OP can avoid PMI.
Have you talked with the owner about the possibility of owner financing?

Could also look at the route of no-cost refi after a certain period. So it's a calculated money loss for a specific period of time in order to gain flexibility.

Effort_to_Stach

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Re: More buying multi-family home and living there questions
« Reply #25 on: February 18, 2014, 03:42:55 PM »
Quote
Could also look at the route of no-cost refi after a certain period. So it's a calculated money loss for a specific period of time in order to gain flexibility.

Yep this is also this is the route that I am leaning towards. I think I should be able to have 20% equity in a year, so assumeing mortgage rates haven't shot up in that time I should be able to refinance then and only get hit with the FHA fees for a short period.