I am about ready to buy a place to live and in my city that would cost ~$800k minimum for a 800 sq ft 2 bed in a decent neighborhood. Looking around though, I am seeing that i could get a 2-3 unit place (albeit not as nicely finished) in the ~$2/3m range. I am in a market that is on par with NYC for rent levels.
Anyone have any color on how making the move to buy a triplex/duplex has gone? I would plan to live in one of the units and rent out the others.
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Conforming loan limit is $1.5M for 4-unit. If you can get financing, I don’t see why not.
You will get a great rate since it’s owner occupied.
Rip it bro, what can possibly go wrong? NOTHING
I made this same move in my city around two years ago. I agree with the above on great financing for owner occupants. You can also leverage up to 96.5% as an owner occupant first time home buyer. You probably know this but its worth mentioning, the bank will count 75% of the rental income in their debt-to-income calculation for you which could help you get a higher priced property.
For my situation, I purchased a three family that was remodeled by a home flipper. I didn't want any value-add risk at the time and was more interested in the cash flow to offset living expenses. I toured the property with a general contractor who was able to point out the few areas where there was shoddy construction work. Whatever your miss during inspection generally becomes your responsibility after closing so definitely make sure you know what you're buying. I was probably overly diligent in my own process - asked my seller for permits and even asked them to make additional repairs to my liking prior to close. Depending on the lender, they will also require an inspection and that certain repairs be made prior to closing. Some sellers might tell you to fuck off if the property is being chased by multiple buyers and you're the only one asking the questions so there's a balance to strike here. End of the day you gotta do what's right for your situation.
My experience has been great so far. I purchased the property fully vacant and did the lease-up myself. I preferred this to an occupied property where your might now know who the tenants are - especially if you are living on the property with them. I borrowed a standard lease from my state and added and amendment page with some additional provisions to cover all of my legal bases. I also ran credit checks and background checks on all applicants. I continue to self-manage after moving out of the property which hasn't been too demanding, although can be a nuisance at times.
There are also plenty of great bigger pockets books out there as well that are great resources. Happy to give you some titles if you're interested. Best of luck with the purchase
What was the purchase price for your 3-fam?
$239K - gotta love a good third-tier city. Seller also contributed toward my closing cost which helped reduce my initial capital
Doesn't the FHA 3.5% down have a limit around $750k?
Depends on the market as it is scaled for 'high cost' areas, but essentially, you're correct. Even in high cost markets, the limit is around $765K. If you're not in NYC / Bay Area / etc, there's a good chance it's even lower than that.
What counts as owner-occupied these days? I was under the impression you would have to occupy 51%+ of the total SF in order to be considered owner occupied..? And anything below would be considered investment real estate, and therefore larger cash down requirements. I guess I am wrong?
Anything up to 4 units qualifies for a residential mortgage if you occupy one of the units. There are wrinkles to that rule but thats the basic guideline.
More info here - if its a 4plex with some additional retail or office, there's a requirement that 51% of the structure has to be dedicated to residential in order to qualify at 3.5% down. During the appraisal process, an appraiser also has to deem that the structure is primarily dedicated to residential
Conceptually, how do people feel about putting only 3.5% down for a property like this? In CRE that would be insanely high leverage (which you couldn't get anyway). With that little equity you'll be underwater if the market even twitches.
I guess it's somewhat different because the debt is non-recourse and the equity is not that large in absolute terms, since the price you can pay is capped. So you won't necessarily be personally destroyed if you lose the money.
Still, it's a lot of debt...thoughts?
It is definitely a lot of debt - I put down 5% for my purchase. In my market, prices have yet to reach pre-recession levels so at $239K I feel pretty comfortable that I'm not buying at a high point. There's also been a lot of increased investment in the area- uncertain if that will lead to favorable appreciation but hey you never know. For me this is purely a cash flow play. For the market risk I'm taking, my cash on cash returns are around 64% including additional capital added. My rents are also not at the top of the market. So if I wanted to begin paying down the debt, I have the flexibility to do so pretty aggressively. I can easily see this not working out so well in some markets however so like most investments it comes down to both asset and market selection.
Depends on whether you're in a recourse or non-recourse state. Non-recourse state, you can always do jingle mail if the transaction blows up on you.
I felt differently about this in my 20s. Now that I'm in my 30s, I don't mind leverage as long as it's good leverage. That is, low interest rate, tax deductible, and non-recourse.
We need more data. Do simple BOE calcs. What is your LTV, what is your monthly rent and interest payment? Are rents covering mortgage? I guess unlikely if you're living in 1/3 units, but if there's a shortfall, how big is it, and what is your salary/other source of income to cover that shortfall?
I purchased a triplex in Brooklyn 2 years ago under an FHA loan with the intent on living in one unit and renting out the other two. I ultimately did not end up residing in the unit and kept the current tenants in place and continued renting it out as it was one of the few properties that had positive cash flow.
They increased the FHA loan limits shortly after I closed but the increase should definitely be beneficial for buyers. Just remember you are going to have to pay PMI, my monthly PMI payment is factored into the monthly mortgage payment and is around $600/month. I would also confirm with any lender you use that when you accumulate 25% equity does the PMI automatically go away, or do you need to refinance out.
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