Most home owners dream of the day 15- or 30-years down the line when they will be living mortgage free. But why wait that long? What if you could live essentially mortgage-free from day one, while building equity and saving money? Purchasing a multifamily home and living in one unit while renting out the remaining units provides homeowners the opportunity to live essentially mortgage-free, while they build equity and save money each month. And with mortgage rates still at historic lows, now is a great time to buy – especially if you live in one of the areas of the country experiencing a rental squeeze, where there are not enough rental units available on the market as compared to the number of people who need housing.
There are many advantages to buying a multifamily property over a condominium or single-family home. One of the biggest advantages is that you can potentially build equity very quickly with a multi-unit property. You can opt to pay the monthly mortgage and then to also apply rental income received against the principal of the loan, in order to reduce the total mortgage due faster than originally scheduled. Paying an extra $500 a month on a $250,000 loan can reduce your total payment term by 13 years and almost $85,000. You will build equity on a similarly accelerated schedule, which you could use to finance other investments in the future or to borrow against in the future. You could also simply save your rental income to use for a down payment on a second property, to pay off any other debts you may have such as student loans or credit card debt.
Although there are some compelling advantages to purchasing a multifamily property, there are also some drawbacks. One of the biggest drawbacks to owning and living in a multifamily property is that you’ll have a mortgage obligation while still living in an apartment-like setting. You will be a landlord, and unless you hire and delegate those responsibilities out to a management service (at an additional cost to you), you’ll be the one called at midnight when a leak is discovered. You will also be responsible for screening prospective tenants, collecting rent and settling any disputes between tenants.
While you’ll generate rental income, you’ll also want to makes sure you’re able to cover any repairs that will be needed on the property. Your overall maintenance costs are likely to be higher on a multifamily property than on a single-family home or condominium and your mortgage payment will remain the same whether or not you have rent-paying tenants occupying your units. This may not be as much of a concern if you live in a tight rental market, but is a consideration nonetheless.
Yes; with some qualifications. Mortgage lenders can consider any one-to-four unit multifamily property a primary residence property as long as you intend to live in one of the units. These guidelines also apply to government-backed loans like FHA and VA loans. This is great news to many prospective buyers as FHA loans require as little as 3.5% down, and VA loans may require no down payment at all. Some conventional mortgage loans are likely to require higher down payments for multi-unit properties, as much as 25% down for fixed-rate loan applicants looking to purchase 3 or 4 unit properties, making FHA or VA loans an even more attractive option for prospective homebuyers.
Multifamily properties are not without their risks and drawbacks; however, they also allow for the potential to live in a property essentially rent or mortgage-free with your tenants offsetting your monthly mortgage payment.