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Considering Buying a Multifamily House

This article was written by in Real Estate and Home. 22 comments.


I’m still a fan of the mobility and flexibility offered by renting a place to live rather than buying. I don’t know where I’ll be living in the next few years, and I wouldn’t want to deal with the expense and hassle of selling a house so soon after purchasing. Perhaps my evaluation of my situation is changing, however.

I like the area where I live. As of today’s thinking, I probably won’t move way from the greater Princeton area unless my girlfriend and I decide to live closer to her family in Queens or Long Island. The borough of Princeton is an expensive place to live, as is the surrounding township, so if I were to buy a house in this area it would be out of town.

Though the decision to buy is influenced by my needs and concerns, it’s always helpful to look at the real estate market in the area. For most non-investment real estate transactions, a homeowner would sell one house and buy another, sitting on both sides of transactions. All things being equal, he or she would not see an advantage in a sellers’ boom market because he or she would also be buying, and the same is true in a buyers’ market as he or she would also be selling. The only time one can really take advantage of a buyers’ market is when they are buying a house without selling one, as one would do when buying a first house.

That’s where I stand right now. Home prices are historically low, even if Princeton has seen a 5% increase in median sale prices over the last year. Although the Case-Shiller Home Price Index is up 3.6% this month, many analysts still forecast low prices for a while.

One option I am currently considering is buying a multifamily house, living in one unit and renting out another. With renting being a popular option right now, and with a location in close proximity to an Ivy League campus, this could be an interesting way to build equity and create new cash flow.

If I decide to move away from the area, I could rent both units in the multifamily house. Managing the house from afar could be difficult, but if there is enough cash flow, I could hire a management company.

The plan relies on finding the right kind of house for the right price. If I do end up leaving my day job, it will be harder to qualify for a mortgage and if I do, I’ll most likely have to pay higher interest rates. This plan may need to be enacted, if at all, before I quit the rat race to work on my projects full-time.

Any thoughts are welcome. Do you think this is a good plan? What would you do?

Updated January 17, 2011 and originally published August 31, 2010. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 22 comments… read them below or add one }

avatar Nick

I own a multi-family 200 miles away and it has been a strain at times. But at other times it’s been great.

I like the idea of buying a multi-family and living in one unit – especially if you’re going to be close to the place. The other thing you may want to take a look at is the historical rate of appreciation of a multi-family compared to a single family. I recall reading that multi-family houses have not historically performed as well as single family houses. If that’s the case (especially in the Princeton area) if you make only a small amount of $$ per month, taking into account a possible difference in appreciation you may be better off buying a reasonable single family with a fixed-rate loan and then renting it out as a single if and when you move. You would have to make sure that the rent of the single could pay for it, and I’m not sure if that’s possible in Princeton. Just something to think about.

Good luck!

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avatar Apex

I currently own 8 townhouses that I rent out.

If you understand what you are getting into with being a landlord and are prepared for it I think it’s a good plan.

You are correct that you definitely need to do it before you lose your provable income source. Once you don’t have a W-2, getting a loan will be immensely more difficult.

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avatar ptmoney

I totally agree with Apex. Make all your real estate moves before jumping ship. Something I didn’t think of. The stated income mortgage is no more.

Regarding home values and buying/selling. I would think you would come out ahead in a buyers market if you made a significant jump in square footage within the same market. For instance, we have a town home (2100sqft) and would like something in the 3000sqft range. Theoretically if we sold our home for $10k less, then we should expect to make that up, plus some in the purchase.

I love your rental idea. Close to campus. You’re right there to stay on top of things. Just make sure you have an end game for when you want to move to something else. Good luck.

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avatar Carol at Inthetrenches

I think it is an excellent idea. I am currently doing a series on real estate investment and being a landlord that you might enjoy reading while you are mulling your options. Part 2 will be posted tomorrow. I’m not sure about your state but in mine anything under 4 units is considered as residential property (not commerical) and as such is able to have lower rates on insurance. I would think that since you would be living in one of the units it would be considered as a primary residence for lending purposes but check that with your financial institution to be sure. http://inthetrenches2009.blogspot.com

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avatar Dana

This is a valuable post and valuable website you have put together Carol. Thanks for the link! Praise God!

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avatar Erica Douglass

If you own your own business, you just have to pay yourself as a W-2 (salaried) employee from your business in order to qualify for a mortgage. The problem I ran into was that many banks won’t accept dividend income as proof of income. You’ll also want a 2-year employment history + tax returns for the past 2 years.

Housing isn’t going up anytime soon. You could always just save most of the purchase price in cash and then buy. If buying on a 30-yr mortgage and including taxes and insurance isn’t cheaper than renting the same place, it’s not worth it.

-Erica

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avatar Erica Douglass

If you own your own business, you just have to pay yourself as a W-2 (salaried) employee from your business in order to qualify for a mortgage. The problem I ran into was that many banks won’t accept dividend income as proof of income. You’ll also want a 2-year employment history + tax returns for the past 2 years.

Housing isn’t going up anytime soon. You could always just save most of the purchase price in cash and then buy. If buying on a 30-yr mortgage and including taxes and insurance isn’t cheaper than renting the same place, it’s not worth it.

-Erica

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avatar Pawn

Agree with Apex. My wife and I did a multifamily home in our last city and it was a mixed experience. The price was right because multifamily homes are generally priced based on the income (rent) that can be generated. However, that is also the downside for selling, so you need to be certain you will have the home for a while to justify the sale.

In the end we converted the old home back to a single-family house, which was its original state 110 years ago. After spending one Christmas Eve and Day fixing the tenant’s bathroom while they were out of town, I was done with being a landlord. I like my free time too!

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avatar SustainableLifeBlog

I dont own a house yet, but if I did this would definitely be something I would consider – and I dont live in an area anywhere near as expensive as Princeton. It’s something that I’ve always been used to, because my grandmother rented out half of her house for a long as I can remember.

Right now, the area that I live is fairly cheap and if I saved for 3-5 years, I could probably pay cash for what I need, but I’d still like the potential income source of a rental property. Contracting out the landlord-ing responsibilities (at least the fixing stuff) is also something I would consider.

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avatar Penny Frugalista

You definitely have to be prepared to be a landlord. And you also have to be able to deal with tenants causing wear and tear to their unit (sometimes more “tear” than “wear,” unfortunately). Personally, I wouldn’t want to live in a multifamily home with my tenants, but in and of itself, I think the purchase is a solid idea. I’d wait a little longer to make sure the home prices in your area have bottomed out or stabilized.

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avatar tmurin

I highly recommend it. I had a 2 family house for 10 years in nearby New Brunswick and it worked out very well. Management is easier when you are on site. College towns are great, but it is better to avoid students, if possible by renting to faculty or staff.

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avatar Luke Landes ♦127,495 (Platinum)

That’s a great idea to avoid students. From what I understand, Princeton PhD candidates aren’t so bad as far as tenants go, though. Undergraduates might be something else entirely.

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avatar Luke Landes ♦127,495 (Platinum)

My concern about living in a multifamily house would be that it doesn’t provide much separation. I’d like to have some space between myself and neighbors. If I do follow through with this idea, my time at the multifamily house would be limited.

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avatar Luke Landes ♦127,495 (Platinum)

One thing that could potentially stop me is that I don’t have any particular desire or skill to fix things myself. I’d have to factor in the cost of hiring people to deal with some of the problems. I would have to carefully the consider the numbers to make sure it could work.

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avatar Tom Dziubek

And that could be one of your two biggest sticking points, the other one being dealing with the “tear and wear” that Penny pointed out above. My dad owned rowhouses in Trenton from about 1977-2000. He was fairly handy, able to fix most of the minor things when they popped up and begrudgingly spending money when they were out of his control.

Going to Penny’s point, managing your tenants are a headache all by themselves. The process of maintaining a house, as well as the people who live in it, can be a major drain on your time as well as your wallet. Honestly, it’s almost like adopting a child. Owning a house can be a major aggravation. Owning a house and then trying to fill it with complete strangers who aren’t going to destroy it is another. I’ve found that the majority of people my dad dealt with were inconsiderate slobs who usually lasted 3-4 months in the apartment before they either stopped paying or wrecked the place…sometimes both. Granted, in Princeton you may have better clientele to work with than in Trenton. Also, I’ve got a family member in his 70′s who owns multiple apartment and office buildings. The man usually works 12 hours a day, six days a week just maintaining them. Being a single guy who rents his current place and who isn’t handy, it could be a major culture shock for you. I recommend hanging around someone who does rent out apartments (someone at work?) and talk to them…maybe even visit his rental with him and see what the situation is like.

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avatar Tom Dziubek

And that could be one of your two biggest sticking points, the other one being dealing with the “tear and wear” that Penny pointed out above. My dad owned rowhouses in Trenton from about 1977-2000. He was fairly handy, able to fix most of the minor things when they popped up and begrudgingly spending money when they were out of his control.

Going to Penny’s point, managing your tenants are a headache all by themselves. The process of maintaining a house, as well as the people who live in it, can be a major drain on your time as well as your wallet. Honestly, it’s almost like adopting a child. Owning a house can be a major aggravation. Owning a house and then trying to fill it with complete strangers who aren’t going to destroy it is another. I’ve found that the majority of people my dad dealt with were inconsiderate slobs who usually lasted 3-4 months in the apartment before they either stopped paying or wrecked the place…sometimes both. Granted, in Princeton you may have better clientele to work with than in Trenton. Also, I’ve got a family member in his 70′s who owns multiple apartment and office buildings. The man usually works 12 hours a day, six days a week just maintaining them. Being a single guy who rents his current place and who isn’t handy, it could be a major culture shock for you. I recommend hanging around someone who does rent out apartments (someone at work?) and talk to them…maybe even visit his rental with him and see what the situation is like.

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avatar Noone

You would need to acquire some of these skills. Plumbers in the middle of the night are expensive! After each tenant moves, you need to clean, paint, repair, up-grade and advertise. That can also be expensive. Mortgage lenders usually count only 2/3 of the prospective rental income. The other third of the collected rent goes to pay for time it’s vacant plus the usual expenses. As a landlord, that is about what I have experienced as well. Good luck.

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avatar Noone

You would need to acquire some of these skills. Plumbers in the middle of the night are expensive! After each tenant moves, you need to clean, paint, repair, up-grade and advertise. That can also be expensive. Mortgage lenders usually count only 2/3 of the prospective rental income. The other third of the collected rent goes to pay for time it’s vacant plus the usual expenses. As a landlord, that is about what I have experienced as well. Good luck.

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avatar Luke Landes ♦127,495 (Platinum)

Thanks for sharing the link! I’ll check it out.

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avatar Andrew

Flexo, I’ve heard great things about this strategy. For example, the rent you get from your tenants can pay above and beyond what you might owe on your mortgage, and unlike renting, now you have something to show for it in the end…a real “asset.” The key I think is finding a desirable location where finding renters won’t be a problem for a price high enough to cover or come close to covering your mortgage payments

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avatar Andrew

Flexo, I’ve heard great things about this strategy. For example, the rent you get from your tenants can pay above and beyond what you might owe on your mortgage, and unlike renting, now you have something to show for it in the end…a real “asset.” The key I think is finding a desirable location where finding renters won’t be a problem for a price high enough to cover or come close to covering your mortgage payments

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avatar Freeby50

This could be a very good idea. I think that its key to make sure that you are willing and ready to be a landlord. If you don’t really want to be a landlord then don’t do it.

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