The Benefits of Buying a

Multi-Unit Property for

Your First Home

It can be very costly to buy your first home, so here's a suggestion that may seem contradictory, but can drastically improve the affordability: Instead of buying a single residence, buy several. First time home buyers can benefit from surprising rules of the mortgage system.

Real estate financing is divided into two categories; loans for owner-occupants, and more expensive, more difficult to obtain loans for investors.

"Investment financing" is for buyers who do not physically live in a property, but simply own it and rent it out for the income it will produce. "Owner-occupant" loans are for homes, places where the owner lives within the property.

Owner-occupant financing with little down and low rates is typically available for the purchase of  a single-family house, as well as apartment buildings of up to 4 units. You qualify for owner-occupant financing for properties with one-to-four units as long as you live in one of the units as your primary residence.

The primary benefit of being an owner-occupant is that it allows you to buy more than just a house or condo with easy to obtain owner-occupied financing. You can actually buy property that produces rental income and increases your tax deductions.

When you buy properties with multiple rental units, the world of real estate financing changes. Lenders will apply most of the rental income from the property you are going to purchase to your current income for qualification purposes. This means you can borrow more -- and also that you can offset loan costs with the rental income that those properties produce.

Let's say you buy a property with four units. You'll live in one and rent the others, and each of the three rental units has a fair market rental of $1,000.

In this situation you're likely to get two benefits. First, the lender will count some portion of the rent -- say 80% -- as income for you when determining your qualification standards. In other words, $2400 a month will be added to your income. ($1,000 x 3 units = $3,000. $3,000 x 80% = $2,400)

Why $2,400 and not the entire $3,000? The lender knows you'll have vacancies from time to time, repairs, insurance, taxes and other costs associated with the rental units.

The lender also assumes something else: For income tax purposes, three-quarters of the property in this example will be "investment" real estate. When reporting your income taxes, you'll list your rental income and the associated costs for these units. One of these "costs" will be depreciation, an accounting mechanism that will lower your taxes but will not take any cash directly from your pocket.

When lenders see depreciation they "add back" that cost when looking at your monthly income. The net result is that your effective monthly income for loan qualification purposes will be even more than $2,400 in this example.

Buying a multi-unit property can make great sense, especially for first time home buyers. You'll have help meeting the monthly mortgage payments.  This is especially important in the first few years of ownership -- the time that's often the most difficult financially. Later on, if you elect to move, you can sell the property or you might choose to keep it and just rent out the unit that you had been living in.

What are the drawbacks of buying a multi-unit property? Neither annual rental income nor rising property values can be guaranteed. Also, some owners may feel uncomfortable having tenants so close to where they live. Some tenants can be very pesky and expect far too much of the landlord. Third,  there's always the potential for  excess vacancies and large, costly repairs.

Also, beware of purchasing a property that has too many units. While up to four units is okay, five units automatically classifies the property as "investment" real estate under the guidelines for most loan programs. Most lenders package loans in groups and sell them on the secondary mortgage market to investors. This has the net effect of keeping a constant flow of funds readily available for lending to home buyer. The rules of the secondary mortgage market dictate that any property over 4 units cannot obtain owner-occupant financing, even if the owner lives in one of the units. Five units and higher classify the property as strictly for "investment".

If your goal is to become a successful real estate investor, buying your first property of up to 4 units and being an owner-occupant/landlord, you'll learn a great deal about the essentials of real estate investing.

Real estate ownership requires ongoing maintenance and oversight. As an owner-occupant with a few units, you'll learn "on the job" about making repairs, dealing with tenants, hiring contractors and maintaining rental property. These are valuable lessons which can provide the expertise to create an income and wealth over a lifetime. In fact, many people who've become successful in real estate often started in this very way: with just one small property, owner-occupant financing with little down -- and two to four units.

For complete details, speak with appropriate professionals. Lenders can advise you about available financing; real estate brokers can provide information regarding local rental properties, and you'll need a qualified accountant to explain the tax benefits of multi-unit ownership.