Buying a multi-family home to rent part and live in the rest
"The biggest question is do you want to be a landlord? There are a lot of ups and down to managing property from bad tenants to having to fix a water heater or replace a fridge.   If you aren't interested in being a landlord, it is definitely a bad idea.   If you do want to be a landlord, then the question is how close do you want to be to your tenants?   What if they are up late making noise, etc.?   What if they watch TV all night and you hear it through the walls?   What is your plan?   You ask if people have trouble ""sharing"" a house.   If you are the landlord and the other party the tenant, then you aren't ""Sharing"", you are leasing.   It's a different relationship with different strains." "You are a ""strategic"" investor, which is to say that you are in the best position to evaluate the deal because you already live there. Others don't have this advantage going in, which is why they might not be inclined to do what you're doing. Your biggest advantage is that you know at least one tenant. In essence, you are your own ""tenant"" for the top floor You also presumably have a pretty good idea of the neighborhood. These are arguments for owning your own home, although it does get a bit trickier with a second tenant, whom you may not know. Do check credit and references, etc. You might ask the landlord why he wants to sell. Presumably it's because he wants to retire or move, and not a problem with the property. But it does no harm to ask." First, you can look up the property tax of the building you are in for an exact number. Go to you town's tax office or look at Zillow. You need to claim the rent as income, but will take all expenses as well as depreciation on half the building. The numbers may well work in your favor, especially as a resident landlord. I still own a rental in the next state, but it's 2 hour away, so I'm paying pros to do the simplest things. On site, you can handle all maintenance and save that way.  If the cash flow looks like it's better than what you have right now, it might be time to buy. Without seeing the numbers I can't point out what you might be missing. There's nothing wrong with it. Living in a two-family house and renting the downstairs was a fairly standard path to the middle class and home ownership in the 20th century. Basically, if market conditions are good, you'll have someone else paying your mortgage. The disadvantage of the situation is that you're a landlord. So you have to deal with your tenant, who is also a neighbor. Most tenants are fine, but the occasional difficult person may come out of the woodwork. That model of achieving home ownership became less popular in the late 60's-early 70's when the law allowed two incomes to be used for mortgage underwriting. Also, as suburbanization became a national trend, absentee landlords became more common Sounds like you are in the right place at the right time, and have stumbled into a good deal. Others have already made good points, so I'll just add a few more: You say that if you bought it, your mortgage, insurance, and taxes minus the rental income from the bottom floor would leave you with costs of 1/4 of your current rent. That means you're getting a fantastic deal on the purchase price. I suspect you may be underestimating some of those costs. So, get exact figures on the mortgage, insurance and taxes and do the math. If it is that good, go for it, just make sure to get that home inspection (in case there's major problems and they're trying to get out while the gettin's good) Also, some advice: Be prepared to cover that entire monthly cost for a few months. Units can stand empty for a while. Also, you may want to rent out slowly - a good tenent found after a couple months is much better than a bad tenent found quickly. Also, have some money set aside for maintenence. As a renter, you've never really had to think about that before, but as a homeowner you do. As a landlord, it's even more important - you can not fix something in your own home for a while if you needed to wait, but in a tenent unit, you have to fix it immediately.  Finally, taxes: You do get to deduct interest, and so on, but it'll work a little differently than you think. You'll have to split it in half (if the units are the same size) and deduct half the interest as a normal homeowner deduction, the other half as a business expense. Same for PMI, insurance, and property taxes. If you do maintenance that effects both units, like fixing the roof, half will be deductible, the other half not. However, maintenance that only affects the tenant unit is fully deductible.  You can claim depreciation, but only for half. So, your starting amount you can depreciate would be (purchase price - land value)/2. Same thing here - half is your home, the other half is a business.  Note that some things you'd think of as maintenance costs actually can't be deducted, only depreciated over time. Take that leaky roof, for example. If you replaced it instead of repairing it, you could not deduct your replacement costs. It counts as an improvement, and gets added to your cost-basis, where you depreciate it along with (half!) the house.  If your tenant's refrigerator went out, and you replaced it, you couldn't deduct that either. However you can depreciate all of it on another schedule (seperate from home depreciation). If you repaired it instead, you can deduct all of it immediately.  Taxes suck. Think carefully about the added expenses.  It may still make sense, but it probably won't be as cheap as you are thinking.  In addition to the mortgage and property taxes, there is also insurance and building maintenance and repairs. Appliances, carpets, and roofs need to be replaced periodically.  Depending on the area of the country there is lawn maintenance and now removal. You need to make sure you can cover the expenses if you are without a tenant for 6 months or longer.  When tenants change, there is usually some cleaning and painting that needs to be done. You can deduct the mortgage interest and property taxes on your part of the building.  You need to claim any rent as income, but can deduct the other part of the mortgage interest and taxes as an expense.  You can also deduct building maintenance and repairs on the rental portion of the building.  Some improvements need to be depreciated over time (5-27 years).  You also need to depreciate the cost of the rental portion of the building.  This basically means that you get a deduction each year, but lower the cost basis of the building so you owe more capital gains taxes when you sell. If you do this, I would get a professional to do your taxes at least the first year.  Its not hard once you see it done, but there are a lot of details and complications that you want to get right. Also, does anyone know of any books on doing this sort of thing, i.e. renting out half of your home to a tenant and living in the ret? Head down to your local library. Mine has a state guide for renters and another one for landlords. There will likely be a lot of Nolo Press books around there too.  You can also research the property tax on a lot; many counties run an arcGIS server that will tell you who owns a given property, what the assessed value is and the total tax bill, etc. A professional home inspection will clue you in on any problems you might be buying, so it's important in any real estate transaction. If the seller finances the loan, you need a lawyer. It might be a nice opportunity - being in the right place at the right time.  You just have to investigate all angles. Disadvantage is that tenant could sue you for something, and in an unfavorable judgement they would have access to your house as property to possess. You could lose the house. Even if you make an LLC to hold the house, they'll either sue you or the LLC and either way you could lose the house. This might be why the landlord is moving to Florida where their house cannot be possessed in a judgement because of the state's strong homestead exemption ;) This is one of those too good to be true things that is actually true. Why? Because only you can do this. Only you can deduct for primary home mortgage interest, only you can get a low cost mortgage (others would have to get investor mortgages at a higher interest rate). So its only a great deal for you. More people would do it if they could, but they can't, thats why you can and should do this. I have a similar setup and it is terrific.
Carnegie Mellon University (CMU) and the University of Pittsburgh (Pitt) have different end of term dates but by less than a month.  Both have summer sessions, but most students do not stay over the summer.  You can rent over the summer, but prices fall by a lot.  Thirty to forty thousand students leave over the summer between the two.  Only ten to twenty thousand remain throughout the year and not all of those are in Oakland (the neighborhood in Pittsburgh where the universities are located).  So many of the landlords in Oakland have the same problem.  Your competitors will cut their rates to try to get some rent for the summer months.   This also means that you have to handle eight, nine, and three month leases rather than year long and certainly not multiyear leases.  You're right that you don't have to buy the latest appliances or the best finishes, but you still have to replace broken windows and doors.  Also, the appliances and plumbing need to mostly work.  The furnace needs to produce heat and distribute it.  If there is mold or mildew, you will have to take care of it.  You can't rely on the students doing so.  So you have to thoroughly clean the premises between tenants.   Students may leave over winter break.  If there are problems, the pipes may freeze and burst, etc.  Since they're not there, they won't let you know when things break.   Students drop out during the term and move out.  You probably won't be able to replace them when that happens.  If you have three people in two bedrooms, two of them may be in a romantic relationship.  Romantic relationships among twenty-year olds end frequently.  Your three people drops back to two.  Your recourse in that case is to evict the remaining tenants and sue for breach of contract.  But if you do that, you may not replace the tenants until a new term starts.  Better might be to sue the one who left and accept the lower rent from the other two.  But you likely won't get the entire rent amount for the remainder of the lease.  Suing an impoverished student is not the road to riches.   Pittsburgh is expected to have a 6.1% increase in house prices which almost all of it is going to be pure profit. I don't know specifically about Pittsburgh, but in the national market, housing prices are about where they were in 2004.  Prices were flat to increasing from 2004 to 2007 and then fell sharply from 2007 to 2009, were flat to decreasing from 2009 to 2012, and have increased the last few years.  Price to rent ratios are as high now as in 2003 and higher than they were the twenty years before that.  Maybe prices do increase.  Or maybe we hit a new 20% decrease.  I would not rely on this for profit.  It's great if you get it, but unreliable.   I wouldn't rely on estimates for middle class homes to apply to what are essentially slum apartments.  A 6% average may be a 15% increase in one place and a 3% decrease in another.  The nice homes with the new appliances and the fancy finishes may get the 15% increase.  The rundown houses in a block where students party past 2 AM may get no increase.   Both the city of Pittsburgh and the county of Allegheny charge property taxes.  Schools and libraries charge separate taxes.  The city provides a worksheet that estimates $2860 in taxes on a $125,000 property.  It doesn't sound like you would be eligible for homestead or senior tax relief.  Realtors should be able to tell you the current assessment and taxes on the properties that they are selling you.   You should be able to call a local insurance agent to find out what kinds of insurance are available to landlords.  There is also renter's insurance which is paid by the tenant.  Some landlords require that tenants show proof of insurance before renting.  Not sure how common that is in student housing. Yes, but how does that compare to those with multiple houses?  I build homes in the Seattle area for a living and one lifestyle who own several rentals... One thing them do is use equity for their 4 homes to purchase another.. Writing off the the interest paid on the loan(s)...  I'm not saying it's a deduction normal people don't use... I'm just saying that it strikes me as a deduction that the wealthiest  landlords use more with better results... As a landlord for 14 years with 10 properties, I can give a few pointers: be able and skilled enough to perform the majority of maintenance because this is your biggest expense otherwise.  it will shock you how much maintenance rental units require. don't invest in real estate where the locality/state favors the tenant (e.g., New York City) in disputes.  A great state is Florida where you can have someone evicted very quickly. require a minimum credit score of 620 for all tenants over 21.  This seems to be the magic number that keeps most of the nightmare tenants out makes sure they have a job nearby that pays at least three times their annual rent every renewal, adjust your tenant's rent to be approximately 5% less than going rates in your area.  Use Zillow as a guide.  Keeping just below market rates keeps tenants from moving to cheaper options. do not rent to anyone under 30 and single.  Trust me trust me trust me.  you can't legally do this officially, but do it while offering another acceptable reason for rejection; there's always something you could say that's legitimate (bad credit, or chose another tenant, etc.) charge a 5% late fee starting 10 days after the rent is due.  20 days late, file for eviction to let the tenant know you mean business. Don't sink yourself too much in debt, put enough money down so that you start profitable.  I made the mistake of burying myself and I haven't barely been able to breathe for the entire 14 years.  It's just now finally coming into profitability. Don't get adjustable rate or balloon loans under any circumstances.  Fixed 30 only.  You can pay it down in 20 years and get the same benefits as if you got a fixed 20, but you will want the option of paying less some months so get the 30 and treat it like a 20. don't even try to find your own tenants.  Use a realtor and take the 10% cost hit.  They actually save you money because they can show your place to a lot more prospective tenants and it will be rented much sooner.  Empty place = empty wallet.  Also, block out the part of the realtor's agreement-to-lease where it states they keep getting the 10% every year thereafter.  Most realtors will go along with this just to get the first year, but if they don't, find another realtor. buy all in the same community if you can, then you can use the same vendor list, the same lease agreement, the same realtor, the same documentation, spreadsheets, etc.  Much much easier to have everything a clone.  They say don't put all your eggs in one basket, but the reality is, running a bunch of properties is a lot of work, and the more similar they are, the more you can duplicate your work for free.  That's worth a lot more day-to-day than the remote chance your entire community goes up in flames In most cases an rent with option to buy is structured as follows: The renter/buyer will place a deposit/premium (not the same as a security deposit) that purchases the option( the right ) to buy the home at a future date at a specific price. The renter / buyer will often pay extra rent in addition to market rent.  Many times this additional rent is contracted to be applied to the purchase price of the home. The risks to the renter/buyer are as follows: Also, something to note: Many people will recommend that you use the additional rents to be applied specifically towards the downpayment.  Be wary of this.  There are no institutional lenders available today that will allow the additional rent money to be applied towards your downpayment.  That means you must come up with the downpayment in cash before closing.  The additional rent payments can  be used towards the price.   Hope that helps.  Good luck! "To add to what other have stated, I recently just decided to purchase a home over renting some more, and I'll throw in some of my thoughts about my decision to buy. I closed a couple of weeks ago. Note that I live in Texas, and that I'm not knowledgeable in real estate other than what I learned from my experiences in the area when I am located. It depends on the market and location. You have to compare what renting will get you for the money vs what buying will get you. For me, buying seemed like a better deal overall when just comparing monthly payments. This is including insurance and taxes. You will need to stay at a house that you buy for at least 5-7 years. You first couple years of payments will go almost entirely towards interest. It takes a while to build up equity. If you can pay more towards a mortgage, do it. You need to have money in the bank already to close. The minimum down payment (at least in my area) is 3.5% for an FHA loan. If you put 20% down, you don't need to pay mortgage insurance, which is essentially throwing money away. You will also have add in closing costs. I ended up purchasing a new construction. My monthly payment went up from $1200 to $1600 (after taxes, insurance, etc.), but the house is bigger, newer, more energy efficient, much closer to my work, in a more expensive area, and in a market that is expected to go up in value. I had all of my closing costs (except for the deposit) taken care of by the lender and builder, so all of my closing costs I paid out of pocket went to the deposit (equity, or the ""bank""). If I decide to move and need to sell, then I will get a lot (losing some to selling costs and interest) of the money I have put in to the house back out of it when I do sell, and I have the option to put that money towards another house. To sum it all up, I'm not paying a difference in monthly costs because I bought a house. I had my closing costs taking care of and just had to pay the deposit, which goes to equity. I will have to do maintenance myself, but I don't mind fixing what I can fix, and I have a builder's warranties on most things in the house.  To really get a good idea of whether you should rent or buy, you need to talk to a Realtor and compare actual costs. It will be more expensive in the short term, but should save you money in the long term." "This might be a good idea, depending on your personality and inclinations. Key points: How close is the building to you? Do not buy any building that is more than 20 minutes travel from where you are. Do you have any real hard experience with doing construction, building maintenance and repair? Do you have tools? Example: do you have a reciprocating saw? do you know what a reciprocating saw is? If your answer to both those questions is ""no"", think twice about acquiring a property that involves renovation. Renovation costs can be crushing, especially for someone who is not an experienced carpenter and electrician. Take your estimates of costs and quadruple them. Can you still afford it? Do you want to be a landlord? Being a landlord is a job. You will be called in the middle of the night by tenants who want their toilet to get fixed and stuff like that. Is that what you want to spend your time doing, driving 20 minutes to change lightbulbs and fix toilets?" 'Rent to own' is not a precise, single agreement. It can be whatever the seller and you agree to. It's a unique seller that would agree to this. Keep in mind, most sellers are needing to get their money in full to buy their next house. You might find an investor willing to work with you, but only for an inflated price, interest rate, or both.  The ideal seller would be underwater (owing more than the value of the home) but needing to move. In which case, they are hoping to find someone to buy them some time to get situated in their new house before moving forward with you and the bank to arrange a sale.  At its simplest, you might pay a premium on your rent to fix the price, giving you the option to buy during a particular period at that price.  It can be a much higher premium where you are renting and paying extra until you hit 20%, at which point you agree to finance the balance either with a bank loan or through the seller.  Buying a home you will live in is a personal decision. With no numbers offered, it's not like we can tell you if it's a wise purchase. It's hard to financially justify buying a house just for one person to live in. You end up being 'over-housed' (and paying for it). Would you rent a whole house for yourself?  A condo might be an option - but TO ME the maintenance fees are hard to take (and they are notorious for increasing dramatically as the building ages). You could consider buying a house that includes 1 or 2 rental units, or sharing with a friend. You do run the risk of having bad tenants though, and you have additional maintance to deal with. Having a rental unit in my modest house has worked out very well for me (living alone), and I have been VERY fortunate with tenants. It depends on the terms of the mortgage. Generally speaking, residential mortgages specifically prohibit letting out a property without the bank's express permission -- but as you say, that tends to assume that the whole property is being let, not just a part of it. Conversely, buy-to-let mortgages generally prohibit living in the property yourself! The final arbiter as to what is allowed under a mortgage is the mortgage provider; so the safest option is to speak to one or more banks, and see what they say. (Note that if you're changing the use of part of a property from business to residential, you may need to apply for permission; check with your local council.) What kind of financial analysis would make you comfortable about this decision? The HELOC and ARM are the biggest red flags to me in your current situation.  While I don't expect interest rates to skyrocket in the near future, they introduce an interest rate risk that is easy to get rid of.  Getting rid of the HELOC and converting to a fixed mortgage would be my first priority. If you also want to upgrade to a new home at the same time (meaning buy a new home contingent on the sale of your first, paying off the HELOC and mortgage), that's fine, but make sure that you can comfortably afford the payment on a fixed-rate mortgage with at least 20% down. I would not take additional cash out of your equity just to save it.  You're going to pay more in interest that you're going to get in savings.   From there things get trickier.   While many people would keep the first property on a mortgage and rent it out, I am not willing to be a landlord for a part-time job, especially when the interest on the mortgage gouges my return on the rent.  PLus leverage increases the risks as well - all it takes is to go one or two months without rent and you can find yourself unable to make a mortgage payment, wrecking your credit and possibly risking foreclosure. So my options in order of precedence would be: At what point does it make sense to become a landlord? The complicated answer is when the benefits (rent, appreciation) relative to the costs (maintenance, interest, taxes, etc.) and risks (lost rent, bad renters, home value variance) give you a better return that you could find in investments of similar risk.  The simple answer is when you can pay cash for it.  That takes interest and lost rent out of the equation.   Again, some are willing to take those risks and pay 20% down on rental property.  Some are able to make it work.  Some of those go broke or lose their properties.   when calculating the 20% down of a new property, does that need to be liquid funds, or can that be based on the value of the home you are selling You can make the purchase of the new home contingent on the sale of the first if you need to get the equity out of it to make the 20%.  Do NOT refinance the first just to pull out the equity to make a down payment.  It's not worth the fees of a refinance. "Your lack of numbers makes the question a difficult read.  What I'm hearing is ""I want a house requiring a mortgage 8X my income.""  This alone is enough to suggest it's a bad deal. On a personal note, when my wife and I bought our house, it was 2.5X our income. 20% down, so the mortgage was exactly 2X income. And my wife was convinced we were in over our heads.  The use of a partner who will take a portion of the profit is interesting, but doesn't change the fact that you are proposing to live in a house that costs far too much for you. If you are determined to buy such a house, I'd suggest you do it with the plan to rent out a room or two to roommates. If you are living in an area where the cost of buying is so high, the demand for rentals is likely high as well.  Absent a plan to bring ion more income, I see no good coming from this. Heed the warnings posted in the other two answers as well." Buying a starter home is not a bad idea if you have a stable job and plan to stay in the area for a long time. Owning a house that you can afford is a very good idea.  Purchasing a home that you do not want to live in long term is not a good idea. People who move frequently pay a lot in real estate commissions, as you've mentioned, but they also pay loan origination and title fees. Mortgage interest is tax-deductible, and many people consider home ownership to better than renting because of that fact alone. What they do not consider are costs of property taxes, HOA fees (common in condos and townhouses, but also possible in single family homes), and being tied to piece of real estate if the job market changes and they need to move. The easy rule of thumb is to consider the ratio of total price to one year of rent. If you could purchase for $200k, but you would rent for $800 per month then the price to rent ratio is 20.83. Depending on the market most homes fall between 10 and 20. When the ratio is less than 10, then you would be at a great disadvantage renting instead of purchasing, when the ratio is greater than 20, you would be foolish to buy instead of rent unless there was some other compelling factor motivating the purchase. What you haven't mentioned is the purchase risk.  You say that she will buy but then say you will be on the loan. If you are on the loan, essentially you will be purchasing a rental property and renting to your mother.  So that is the analysis you need to consider. You need to be financially able to take on this purchase and be willing to be a landlord. The ten year timeline looks good on paper. This may not be realistic, especially with an aging parent.  What if after 4 years, she can't stay in that condo?  What renting buys is flexibility. If she needs money for any reason, it is not tied up in an asset and unavailable. She is able it move if necessary. If she won't need the money, she should buy in cash. That, by far, gives her the best deal. "Buying now with a mortgage gets you: Waiting to buy with all cash gets you: These are also some of the pros or cons for the rent or buy dilemma that Paul mentioned in comments to the OP. This is a very complex, multi-faceted question, that would not respond well to being put into any equation or financial model. Most people answer the question with ""buy the home now with a mortgage"" if they can pay for the down payment. This is why the mortgage industry exists. The people who would want to finance now rather than buy with all cash later would not only be analyzing the question in terms of financial health but also in terms of general well being. They might consider the tremendous pride that comes with home ownership and living under a roof of one's own. Who can say that those people are wrong?" "Due to the issues in the Eurozone, many foreign investors were buying Swiss Francs as a hedge against a Euro devaluation. They were in effect treating the Franc like gold, silver or some other commodity with perceived intrinsic value. This causes huge problems from the Swiss, as the value of the Franc increased and their exports became more expensive for foreigners to purchase. Things were getting bad enough that the Swiss in some places were travelling to Germany to buy groceries! To enforce this ""fixing"" of the Franc, the Swiss Central Bank announced that they would buy foreign currency in unlimited quantities by printing Francs. In reality, just announcing that they were going to do this was sufficient to discourage foreign investors from loading up on Francs. NPR's Planet Money did a really good job covering this topic:"