Trying to create a plan (post mortgage crisis) to buy a duplex as our primary residence & keeping rental prop?

We now live in a two bedroom apt of a quadplex, which I bought back in March and I can see us living here for another year or two but long term we're gonna definitely need more space. Our 16 month old son lives in our room, and it’s getting cramped not to mention we’d like to have another child at some point. I've been looking at duplexes for sale in the area (WI) and for around $140,000 it seems like it’s possible to get something that would fit our needs. So what I’m asking is for you to read on, and help me figure out if this is even possible (even if it’s a long shot) and then tell me in your experience what the best order of planning should be. I was originally going to renovate the attic of our quadplex to provide more space for us, but I’m glad I waited on that idea because that renovation cost would be better spend on a down payment of a duplex for us. Reason being it would keep us on the ground floor, get us living away from the rental property, and be a much better long term investment.

A little background on us (scroll to very bottom for the exact questions):

I am self employed full time, and after expenses earn roughly $2500 a month, I could work a little more and earn a bit more if neededfor a while but I have a good balance as it is now so would rather not unless I had to (probably could earn $400-500 more a month if needed). I also work at a high school part time under a yearly contract and that brings in roughly an additional $350 a month. I also have a third job now, as property manager for the other three tenants, and earn a small amount from that in addition to having free rent and the mortgage completely covered.

Right now, the other three tenants basically pay off the entire mortgage and we're turning a small profit as it is. I was a little worried about the market and keeping the places rented with good people (remember, we live here), but I've been learning a lot, getting my act together, and renovating the units a bit with good results – so I've gained a lot of confidence that this won't be an issue (also prior landlord never had a vacancy in nine years). The rents are set lower than market rate right now, and I recently rented out a two bedroom for about 20% more than it was going for and it is still priced at or just under current market rates. I plan to continue renovations on the other apartments and the total amount of rent for all four units afterwards is anticipated at $1825 a month. To be conservative, lets say I want to keep them cheaper and lower each $25 a month so we're looking at $1725 a month is a good estimate of what I could expect to bring in and with a mortgage payment of $1035 (including tax/ ins escarow, no pmi have 20% down) that means I should be able to expect a monthly income of roughly $700 and that's definitely at renting at below market rate so I know I'll be able to attract quality tenants and already have. THIS NUMBER IS IF WE WERE TO RENT OUT THE APT WE NOW CURRENTLY RESIDE IN, but hopefully it is the number the mortgage originator would be able to use since that money would be coming in as soon as we moved.

So the numbers with those details add up to my personal income being 2850 / month = (1500+350) and additional income from the house being $700 a month, bumping my actual income level to $3550 (2850 + 700). As I said, we are looking to move into a duplex, so there would also be rental income available there, likely amount being anywhere from $450-$700 from the duplexes that I've seen in the $140,000 range around our area. That would bring my total income to $4000 (3550 + 450) a month in the low range being conservative.

I realize I don't make a lot of money, but we need more space, and to be able to make this happen I need to plan for the future to and find out:

1) how much at minimum I need to save up for a down payment for us to move asap. I know 20% down is best so you avoid pmi, but that’s simply not an option for us right now as I just invested all my savings into the quadplex rental property. I know there used to be 3% down, 5% down, and 10% down loans available but I also know the mortgage industry has tightened up a lot. I know if we can get into a duplex soon, we’d have no problem saving and making extra payments on the mortgage to get the second one payed off to 20% within a few years. And I have seen a few listed in favorable neighborhoods that would be easy to rent (colleges, hospitals, nice area, etc), seems like as much of a buyers market as I’ve ever seen.

2) check the lenders rules on what they'll consider for my income (I remember they first said only 75% of the rent could be used, then later said they would make an exception considering my situation where I provided them past leases and aggreements for future tenants and in the end considered 85% I believe). Obviously they didn't include the income from the place we now live, but I hope that they would then consider the 4th apartment income in the qua

2 Answers

  • 1 decade ago
    Best Answer

    You fall into the investor category which typically means 20%-25% down and 2-3 points over prime on the interest rate. A current good relationship with a bank may put you on the best end of those terms, possibly even better depending on the relationship. A portion of your rental income will be considered. Typically they do allow for vacancy though and that can vary from lender to lender, and the property may play a part. Anything less than 20%-25% down and you are likely going to be looking for an owner financed deal, which in the current market is certainly not out of the question. Its a difficult time and there are owners out there that need to sell. Owner financing allows them to not only sell the property, but also get the maximum price for it.

    I would however be cautious in considering your rental income for your own personal calculations. Based on my experience of owning apartment buildings, duplexes, sixplexes, and over 100 single family homes, the best rule of thumb is this. There is no such thing as cash flow on investment property. None. If you don't have this view, then you haven't been doing it long enough.

    I'm not saying it is impossible to have cash flow. I'm saying thats the attitude you should have. Don't plan on it. If it happens, fine. If you can keep it on a small scale, do the repairs yourself, and manage the heck out of your properties, its possible to have some sort of cash flow. Its also possible to do all those things and have a negative cash flow. You increase your luck by keeping things on a small scale.

    Still, you have to plan for problems. Even if all the big ticket items like HVAC, roof, electrical, plumbing, etc., are fine, you still have to keep up all of the cosmetic items like painting, carpet, and general maintenence and upkeep. With 5 rental units it can add up, especially if you have several tenants decide to move out all at once. Problems will come up that you can't plan for, and never would imagine.

    So, you can use your cash flow in trying to obtain a loan, but from there, forget you ever heard the word cash flow. In most cases it simply does not exist.

  • 4 years ago

    Yes. If you live in the property as your primary residence and there are no more than 4 units you can obtain financing as an owner occupant. Duplex, tri-plex or 4-plex are all possible. Hence you do not need to limit yourself to just a duplex. Some people who live in a 4-plex find that the income from the other three covers their full cost of living there. No guarantees but more likely when there is a great amount of income from the rents.

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