The best first home may be a multi-unit home, because having tenants pays off.
Duplexes — a single building with separate units and entrances — are among the least popular homes to buy in the U.S. Only 2% of first-time homebuyers purchased a duplex in 2016, according to the National Association of Realtors, an industry group, compared to 82% of those who bought a detached single-family home. Other options included condos in five-plus unit buildings and townhouses.
Purchasing a home with multiple units, where you live in one and others live next door, upstairs or downstairs, has its perks: mainly, their rent is contributing to your mortgage, you don’t get to share a bathroom and kitchen with your tenant and you’re close by if anything goes wrong. Depending on the number of units or the cost of rent you’re charging, you could also end up making a profit. “If you look at the size and cost of the units, they dovetail with what a first-time homebuyer can afford,” said Dennis Cisterna, chief revenue officer of Westminster, Colo.-based real estate investment site Investability.
Being a first-time homebuyer and landlord goes well together, especially if they live on the same property as their tenants. New homeowners are likely more flexible about their living arrangements, without too many other heavy responsibilities such as children and more attune to the maintenance needed for the property, said Jeremy Gulish, a real estate agent in Morristown, N.J. Meanwhile, they’re able to prepare for the next property they get and have the opportunity to keep the first property as supplemental income, he added.
Using your tenant’s rent as additional income can allow you to qualify for a pricier home. In some cases, you can put down only 5% and get a mortgage from a private lender versus a bank, said Ray Rodriguez, a regional mortgage sales manager at TD Bank in New York. “While they will increase the amount you will write [on the check], it allows them to get into a home,” he said. A third of potential first-time homebuyers did not put down 20% or more, according to a TD Bank survey of 1,000 participants.
That said, people tend to shy away from this type of investment because of the risks involved, experts said. Not every first-time homebuyer is capable of hiring someone to manage the property, which means the onus will fall on you when something breaks or you and your tenant aren’t seeing eye to eye. Some tax rules make homeownership favorable, though the rent you charge is considered income taxes and of course there are potential legal battles you might find yourself in.
“That comes with a whole host of challenges,” said Aleksandra Scepanovic, managing director of Ideal Properties Group, a real estate firm in Brooklyn. “Expect to change people’s light bulbs in the middle of the night or being on the phone with a plumber when the heating goes out on a Sunday.”
Still, it’s not impossible. When Gulish was buying his first home with his wife, they opted for a two-family. At the time, they were in their mid-20s and qualified for a large property at the top of their budget but with a tenant who paid more than half of their mortgage. “Sometimes it’s a leap of faith,” he said.
The most important thing to do, Gulish said, is find the right tenant. Also, ensure you have enough in your emergency funds to take on unexpected scenarios, even if you’re handy at home, said Ash Exantus, a financial empowerment coach a BankMobile, a New York-based banking app. Prepare to have serious conversations, such as rent hikes, Scepanovic said, and know the rules in your area, such as mandated heat requirements. Also be ready to show the home and place its availability on sites renters search as soon as you learn your tenant is moving out, Cisterna added.
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