<
Go Back
PRO BONO REAL ESTATE SERVICES
Information for Buyers
Purchasing a home can be very costly, so here's a suggestion that may seem contradictory, but can drastically improve the affordability: Instead of buying a single residence, buy several. With a primary residence buyers can benefit from surprising rules of the mortgage system.
Real estate financing is divided into two categories; loans for owner-occupants, and more expensive, more difficult to obtain loans for investors.
"Investment financing" is for buyers who do not physically live in a property, but simply own it and rent it out for the income it will produce. "Owner-occupant" loans are for homes, places where the owner lives within the property.
Owner-occupant financing with little down and low rates is typically available for the purchase of a single-family house, as well as apartment buildings of up to 4 units. You qualify for owner-occupant financing for properties with one-to-four units as long as you live in one of the units as your primary residence.
The primary benefit of being an owner-occupant is that it allows you to buy more than just a house or condo with easy to obtain owner-occupied financing. You can actually buy property that produces rental income and increases your tax deductions.
Lenders will apply most of the rental income from the property you are going to purchase to your current income for qualification purposes. This means you can borrow more -- and also that you can offset loan costs with the rental income that those properties produce.
Let's say you buy a property with four units. You'll live in one and rent the others, and each of the three rental units has a fair market rental of $1,000.
In this situation you're likely to get two benefits. First, the lender will count some portion of the rent -- say 80% -- as income for you when determining your qualification standards. In other words, $2400 a month will be added to your income. ($1,000 x 3 units = $3,000. $3,000 x 80% = $2,400)
Why $2,400 and not the entire $3,000? The lender knows you'll have vacancies from time to time, repairs, insurance, taxes and other costs associated with the rental units.
What are the drawbacks of buying a multi-unit property? Neither annual rental income nor rising property values can be guaranteed. Also, some owners may feel uncomfortable having tenants so close to where they live. Some tenants can be very pesky and expect far too much of the landlord. Third, there’s always the potential for excess vacancies and large, costly repairs.
Also, beware of purchasing a property that has too many units. The rules of the secondary mortgage market dictate that any property over 4 units cannot obtain owner-occupant financing, even if the owner lives in one of the units. Five units and higher classify the property as strictly for "investment".
If your goal is to become a successful real estate investor, buying your first property of up to 4 units and being an owner-occupant/landlord, you'll learn a great deal about the essentials of real estate investing.
Real estate ownership requires ongoing maintenance and oversight. As an owner-occupant with a few units, you'll learn "on the job" about making repairs, dealing with tenants, hiring contractors and maintaining rental property. These are valuable lessons which can provide the expertise to create an income and wealth over a lifetime. In fact, many people who've become successful in real estate often started in this very way: with just one small property, owner-occupant financing with little down -- and two to four units.
|
