Buying a first home isn't easy, so here's a suggestion that might surprise you: Instead of buying just one house, buy a few. What I'm suggesting has nothing to do with infomercials or books that say you can get rich quickly and easily through real estate. Instead, a unique part of the mortgage system can help many first-time buyers.
When people talk about "real estate financing," they usually divide mortgages into two groups: loans for owner-occupants and loans for investors, which are more expensive and have stricter terms.
"Investment financing" is for people who don't live in the home they are buying. "Owner-occupant" loans are for homes, where we sleep at night, answer the phone, and park our cars.
But there is a catch:
Owner-occupant loans with low rates and little money down are usually available for more than just a single-family home. Owner-occupant financing is usually available for properties with one to four units, as long as you live in one of them.
If you own your own home and live in it, you can buy more than just a house or condo. You can buy property that brings in rent and gives you more tax breaks.
When you buy a property with two to four units, there are new ways to pay for it. Lenders will count most of your rent as part of your income to see if you qualify. This means you can borrow more money and that the rents these properties bring in can help pay for the loan.
Let's say you buy a building with four apartments. You'll live in one and rent out the others. The fair market rent for each of the three rental units is $1,000.
You are likely to get two things out of this. First, the lender will count some of your rent, say three-quarters, as income when figuring out if you meet the requirements. In other words, your income will go up by $2,250 a month. ($1,000 x 3 units = $3,000. $3,000 x 75 percent = $2,250)
Why only $2,250 instead of all $3,000? Because the lender thinks you'll have vacancies, repairs, insurance, taxes, and other costs for the rental units.
The lender also assumes that three-quarters of the property in this example will be considered "investment" real estate for tax purposes. When you do your taxes, you will have to list the rents and costs for these units. One of these "costs" will be depreciation, a method of accounting that lowers your taxes without taking any cash out of your pocket.
Lenders "add back" the cost of depreciation to your monthly income when they see it. In this case, your effective monthly income will go up even more than $2,250, which will help you qualify for a loan.
Especially for first-time buyers, it can make a lot of sense to buy homes with two, three, or four units. You'll have "help" making your monthly mortgage payments, especially in the first few years, which are often the hardest. If you decide to move in the future, you can sell the property or keep it and just rent out the unit that used to be your home.
As with any investment, you can't be sure that your annual income or property value will go up. Some owners might not like having tenants so close, and there is always the chance that rents won't be enough, there will be too many empty units, or big repairs will need to be made.
Be careful not to go too far. Up to four units are fine, but five units make the property "investment" real estate, which means you can't use owner-occupant financing even if you live there.
The good news is that as both an owner-occupant and a landlord, you'll learn a lot about how real estate investing works in the real world.
When you own property, you have to take care of it and keep an eye on it all the time. As an owner-occupant with a few units, you'll learn "on the job" how to make repairs, deal with tenants, hire contractors, and take care of property. These are important lessons that can help you make money and build wealth for the rest of your life. In fact, many people who have done well in real estate started with just one small property, owner-occupant financing with little down, and two to four units.
Talk to the right people for more information. Lenders can tell you what kinds of loans are available, and real estate brokers can tell you how rentals work in your area. You'll also need a pro to explain the tax benefits of owning more than one unit.
