Many first-time buyers consider buying a multi-family home in order to make home-ownership more affordable. I meet many of these buyers at the workshops that I host at ePlace. And many of our agents work with first-time buyers who are weighing the pros and cons of buying a multi-family or a condo in Cambridge, Somerville, Medford, Arlington, and beyond.
Buying a home that has rental income can help you qualify for a somewhat larger loan and can help substantially with your monthly payments, but also comes with additional responsibilities and higher maintenance and upkeep. Would it make sense for you? Here are some things to think about.
In qualifying you for a multi-family purchase, the lender will typically apply about 22% of the rental income toward your mortgage payment. At today’s 30-year fixed interest rate of about 4.75%, each $1,000 in monthly rental income will add a little over $40,000 to the mortgage you might qualify for, and the rental income can help substantially with monthly payments. Let’s work through an example (see also the spreadsheet with download option below):
If you (or you and your spouse/partner) have $100,000 of gross income and excellent credit, you might qualify for a mortgage (30-year fixed at 4.75%) of about $360,000 and a total purchase price of about $450,000 (assuming 20% down), resulting in a monthly payment (including real estate taxes and insurance) of $2333. With $1,000 of rental income, you can qualify for a slightly larger mortgage — about $400,000 — and purchase price of about $500,000 (assuming, again, that you can put 20% down) — and a monthly payment of $2557. Your rental income helps you buy a bit more house, but — if you apply all or most of it to your mortgage payment — it can lower that payment substantially (to about $1500 a month, in this case). With $2000 in monthly rent, you can get a mortgage for $445,000, a house for about $550,000 (assuming, again, 20% down) and a monthly payment of $2,781, which (if offset by rent) could result in a monthly payment of under $1,000.
Download the Multi-Family Purchase Spreadsheet with formulas.
If you own and live in a 2-family home, you find yourself being a landlord. You’ll want to be familiar with Massachusetts landlord-tenant law and gain comfort with leases and tenant communications. The Massachusetts Consumer Guide to Landlords Rights and Responsibilities is a good starting place. The NOLO website also has excellent resources on landlord-tenant law in Massachusetts. A good rental agent (such as one of our agents from ePlace!) can also be a great help in finding and screening tenants and making sure that you as a landlord are in compliance with the law.
My own experience of 10+ years of being a landlord in a 2-family was overwhelmingly positive. I found living in the same building made it easy to maintain good communication with tenants, while also maintaining appropriate boundaries. I also found that charging a rent that was just a hair below market (and responding quickly and courteously to any issues) made it easy to keep tenants long term so the unit was never vacant.
As a landlord, you’ll have to make decisions about what to charge for rent, whether or not you’ll take pets, and whether or not you want to delead up front or deleading should you rent to a family with a child under 6. If the unit is separately metered, the tenants can pay for their own heat, hot water, and electricity (which is always better) but if your building has a single system then you’ll have to roll the utilities into the rent. Water and sewer works the same way: if separately metered, you can have the tenant pay the bill, but otherwise you foot the bill.
Maintenance and Upkeep
Obviously, owning a multi-family home means you’ll have higher maintenance and repair costs and will take on the duties of landlord, so you’ll want to make sure that you’re up for these tasks. A multi-family building will be bigger and, depending on your lifestyle and family composition, it’s fairly likely that your rental unit will take a greater beating than your own unit: floors may well get worn down faster, walls dinged up, appliances broken, drains stopped up and foreign objects fouling up the garbage disposal. In my investment workshops, I like to budget about $1.50 per square foot per year for basic property upkeep in a multi-family. In my experience, this covers anything that might typically come up in a year (calls to the plumber, new appliances or water heater, and minor repairs) plus a little extra, but will obviously not cover major items like a new roof, heating system, siding or porches.
In my experience, it’s possible to “defer” some maintenance tasks (like some of the larger items mentioned above) until you have the resources to handle them, but it’s important to note that well kept units (and buildings) tend to attract better tenants, so efforts you make to improve your unit for rental can pay off in rental income, lower maintenance, and ease of tentant relationships. This is part of the “just under market” rental equation — if people feel like they’re getting a good value they’re more likely to treat you (and the property) well.
Exit Strategy/Possibilities Down the Line
In addition to helping pay the mortgage, multi-family homes offer some attractive expansion or development possibilities down the line. These include:
- Renovating your unit and renting it out at a higher rent then moving into the other (larger) rental unit;
- Converting your entire building to condos and living in one or selling off both (if you work it right, by moving from one unit to the other, you can sell the entire building tax-free);
- Converting the entire building into a single-family for your own use, or using both units for your own purposes (e.g. using one unit as home office or in-law apartment).
Most of our agents at ePlace in Cambridge MA have experience handling multi-family homes, and many also have experience with both rentals and sales — experience that is quite valuable in assessing the desirability of a potential multi-family purchase and not all that common in the marketplace. Feel free to get in touch if you’re considering purchasing a multi-family. Our Savvy Home Buyer and Nuts and Bolts of Real Estate Investing workshops are also good resources on this topic.