You may think it is a great idea to get help with the costs of buying your own home by purchasing a two-family house or duplex and getting a renter to help you pay the mortgage. You may be right, but be sure you consider how that may change your life, your finances and your right to privacy. Here are eight things to consider before you take that step. (See also: 3 Reasons to Invest in Multi-Family Real Estate.)
Your choices of potential neighborhoods may be significantly limited because multi-family housing – which is any housing other than a single-family home – is not allowed in all neighborhoods. Multi-family housing tends to be in more urban areas. Single-family homes tend to be in suburban areas. You also need to consider whether or not the location you pick will be popular for your potential tenants. If you buy a home in a rougher area of town, for example, you may have a harder time finding quality renters.
You will find different challenges when seeking to finance a two-family home. While you can use the potential rental income to help you qualify for the purchase, you will still need to have good credit, a low debt-to-income ratio, and a large down payment – usually about 25% with multi-family housing. Banks know that tenants can leave and you may need to pay the full mortgage yourself until you find another tenant.
3. Property Cost
Two-family homes usually cost more than single-family homes. So not only will you need to come up with a larger percentage for the down payment, but the down payment itself will also be higher because it will likely be based on a more expensive property.
When you buy a two-family home and live on one side, your tenants will be able to stop by any time with questions or problems. (Remember, as the landlord, you are responsible for making sure that everything is in working order.) You will have less privacy than is usual in a shared dwelling when you're also the landlord. (Read The Complete Guide to Becoming a Landlord and Tips for the Prospective Landlord.)
You will need to be comfortable collecting rent from your tenants and be ready to face the potential that your tenant may not pay or may not pay on time. This can affect your cash flow and your ability to pay the mortgage. If you have to evict the tenants for nonpayment, that can take months and may require you to get legal help.
6. Vacancy Expense
When your tenants leave and the rental portion of the property is vacant, it is known as a vacancy expense. Essentially, you will need to cover the costs of the vacancy until you get the property rented again. You may end up with repairs and painting costs between tenants to fix up the property for the next occupant. You may also need to pay for advertising to get a new tenant.
Your tax return will become much more complex if you choose to become a landlord. There is an entire IRS publication dedicated to the rules of Residential Rental Property (Publication 527) that you will need to read so that you don’t break the rules and can avoid getting in trouble with the IRS. There are chapters on rental income and expenses, depreciation, reporting requirements and even rules for personal use of the property. You will even need to add an entire schedule to your tax reporting called “Supplemental Income and Loss,” or Schedule E.
8. Selling the Property
There are not as many people looking for multi-family housing as there are buyers for single-family housing, so you may find it more difficult to sell than a single-family home. A single-family home can be sold to an individual or an investor. You can also offer a lease-to-own contract.
The Bottom Line
Buying a two-family property can be a great idea to help pay your mortgage, but be sure you are ready to deal with all the issues that will arise when you become an investor and a landlord.