Some people buy a two-family home because they hope to live in one apartment and rent the other to significantly lower their cost of living! While this is a great solution for some, it’s not for everyone. For some, they need more privacy and/or don’t want the responsibilities that come with owning. Other people buy houses for two families, for investment purposes, and it is essential and important, to start this process, with your eyes wide open, understanding both the advantages and the disadvantages. While a well-regarded and properly priced property can be a fantastic investment opportunity, there are others that may not be for certain reasons. With that in mind, this article will attempt to consider, examine, review, and discuss these two scenarios and the process one must go through before making the commitment.
1. Occupied by the owner: An owner-occupied two-family home is eligible, for very similar mortgage conditions and requirements, as a single-family home. Often this is around 0.5% or more, a lower rate than when the owner does not live there. What rate of return and other relevant concerns should be considered? Start by considering the cash flow, that is, the owner’s outflow, versus the rent charged. How will this compare to your costs if you purchased a single-family home? How comfortable will you feel owning? Are you helpful or will you need to hire others, whenever there is a repair needed, etc.? Do you have the kind of personality that could handle some of the inherent stresses and strains involved? Will you be happy sharing ownership, making sure your tenant takes decent care of the part you occupy and any potential challenges, in terms of privacy and other issues?
two. Non – Owner Occupied: Start with a realistic assessment and analysis of income and expenses. Will it generate enough cash flow to avoid financial challenges and additional stress? Unless you are convinced that there will be a positive cash flow situation, you should generally avoid investing. Consider only about 75% of the realistic rent, to account for vacancies and other unforeseen contingencies. On the expense side, add your mortgage payment (including principal, interest, real estate taxes, and escrow) to your monthly contributions in various reserve funds, for repairs, renovations, improvements, etc. . If this is positive, then move on to a rate of return or ROI/return on investment analysis. Consider the total cost of purchasing the property (purchase price plus initial renovations/improvements/repairs) and your annual rent. Look for at least a 6% return.
An investment property can be your smartest move, or a risky and reckless one! Follow these simple steps, from the very beginning, and proceed accordingly.