buy house or income property

How to own a home for a lower payment than you thought was possible

It may come as a surprise, but becoming a homeowner in expensive areas can be more affordable than you thought. Perhaps you have a plan laid out to pay off debts that impact your income such as an auto loan or college loan. You may be to put your goal into action sooner by making some adjustments.

Consider a Multifamily Property
When the average home in San Diego County and Orange County are $592,000 and $725,900 respectively, your income needs to be more than $140,000 annually according to HowMuch1.  As an alternative, look into a residential property built for two (duplex), three (tri-plex) or four (four-plex) families.

Generally, for a properties like these, you live in one unit and rent out the other unit(s) to tenants. In some cases, your full mortgage payment might be covered from the rental income.  of course, you may be able to do this with a single family home that has enough yard space to build a permitted unit for additional income.

The additional income can be significant because prices in high-cost areas are often mirrored in local neighborhood rents, as well. How does that sound as a quick way to owning a home with an affordable payment?

North San Diego duplex
Duplex in Carlsbad, CA

Here’s an example of a Single Family Home(SFH) & Duplex purchase in University Heights area in San Diego as of January, 2019

 SFH price: $809,900 for a 3 bedroom 2 bath and 1200 sq. ft.

 Duplex price: $875,000  for a (2) 700 sq. ft. bedroom 2 baths with separate front & rear yards

The home payment will run you approx. $3,182/month and the duplex $3,491 with a 20-percent down payment, credit scores above 720, and qualifying income. Not all borrowers will qualify.  The duplex costs $299/mo more but as rents continue to rise in the area you can charge the tenant more. You may be able to get $1,200 from a roommate on the home purchase but the duplex should get $1,600 – $2,000 depending on the quality of the interior.

Upgrade the unit to receive premium rents with better counters, flooring, windows, and bathroom. An upgraded unit will appeal to many renters right away and you’ll be raising your rent every few years as allowable. Imagine if this property was a tri-plex or four-plex wit upgraded units.

Naturally, you’ll need to do your due diligence in your local neighborhood to see whether this might be worth pursuing financially. Research the rents in the area, utilities cost, insurance, and more figures during your calculations.  You may want to change the area or even the state where to make a purchase after doing the calculations

Related: Tips for landlords (How to set your rent)

Responsibilities of being a landlord
Whether this will be a good transaction for will depend somewhat on how much time you’re willing to dedicate in being a landlord. If you are a busy person or don’t have the skills and personality for this profession, you’ll need to hire a property manager to do this.

A good way to find out are you comfortable collecting rents and making sure tenants act considerately and aren’t doing anything illegally. Are you comfortable repairing a leaking faucet, a non-functioning garbage disposal, broken toilet seat or serving them a 3-day notice to pay rent?  Can you easily handle all the paperwork that a landlord routinely does?

If you answered No to some or all these, you need to estimate more expenses into paying a property manager to arrange such work.

Financing for multi-unit properties
There’s good news when it comes to financing two- to four-unit properties. The FHA guarantees loans and non-conventional loans may allow you a lower down payment than the typical conforming loan from your local bank. FHA allows higher borrowing maximums based on the property being either a two, three, or four-unit property.

You may be approved for an FHA loan with a down payment of just 3.5 percent on a duplex, tri-plex, or four-plex. Furthermore, the down payment can be a gift from a relative, you can have non-occupant co-borrowers and your credit score does not have to be 620 or higher. Although, credit issues within the last two years may hurt your chances of being approved. VA loans (for veterans and actively serving military members) can provide and even better deal, with 100-percent financing but have borrowing maximums based on single family homes.

By using a non-conforming loan may allow you to borrow 90-percent financing on an owner-occupied duplex up to $1.5 million in the entire state. In contrast, a conforming loan would require more than 25-percent down.

The amount you’ll be able to borrow will depend on the county where you want to buy. For maximum loan limits on FHA, Conforming, Non-conforming, and VA loans for multi-unit homes, check with a licensed loan officer.

  1. source: HowMuch – https://howmuch.net/articles/salary-to-afford-the-average-home-in-your-state