Title:
A Mortgage Secret
for First-Time Buyers: It Can Pay To Buy More
Word Count:
710
Summary:
It's not easy to
buy a first home, so here's a suggestion that may be surprising: Instead of
buying one residence, buy several. What I'm suggesting has nothing to do with
late night infomercials or books that promise fast and easy wealth from real
estate. Instead, many first-time buyers can benefit from an interesting quirk
in the mortgage system.
Keywords:
Article Body:
It's not easy to
buy a first home, so here's a suggestion that may be surprising: Instead of
buying one residence, buy several. What I'm suggesting has nothing to do with
late night infomercials or books that promise fast and easy wealth from real
estate. Instead, many first-time buyers can benefit from an interesting quirk
in the mortgage system.
When you hear people talk about "real estate financing" they
generally divide mortgages into two categories; loans for owner-occupants and
more expensive and tougher loans for investors.
"Investment financing" is for buyers who do not physically reside at
a property. "Owner-occupant" loans are for homes, the places where we
stay at night, the phone rings and the car is parked.
But there's a wrinkle:
Owner-occupant financing with little down and low rates is typically available
for the purchase of more than a single-family house. Normally you can get
owner-occupant financing for properties with one-to-four units as long as you
use one as your prime residence.
In other words, your status as an owner-occupant allows you to buy more than
just a house or condo. You can actually buy property that produces rent and
increases your tax deductions.
When you buy properties with two-to-four units the world of real estate
financing changes. Lenders will apply most of the rent to your income for
qualification purposes. This means you can borrow more -- and also that you can
offset loan costs with the rents such properties produce.
Suppose you buy a property with four units. You'll live in one and rent the
others. 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 three-quarters -- as income for you when
determining your qualification standards. In other words, $2,250 a month will
be added to your income. ($1,000 x 3 units = $3,000. $3,000 x 75% = $2,250)
Why $2,250 and not the whole $3,000? Because the lender assumes you'll have
vacancies, repairs, insurance, taxes and other costs for the rental units.
The lender also assumes something else: For tax purposes, three-quarters of the
property in this example will be "investment" real estate. When
reporting your income taxes you'll list your rents and costs for these units.
One of these "costs" will be depreciation, an accounting device that
will lower your taxes but take nothing in cash from your pocket.
When lenders see depreciation they "add back" that cost when looking
at your monthly income. The result is that your effective monthly income for
loan qualification purposes will increase even more than $2,250 in this
example.
Buying two-, three- and four-unit properties can make great sense, especially
for first-time buyers. You'll have "help" meeting monthly mortgage
payments, especially in the first few years of ownership -- the time that's
often the most difficult. 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 had been
your residence.
As with all investments, neither annual income nor rising property values can
be guaranteed. Some owners may feel uncomfortable having tenants so close and
there's always the potential for insufficient rents, excess vacancies and big
repairs.
Also, beware of going too far. While up to four units is okay, five units
automatically classifies the property as "investment" real estate
under the guidelines for most loan programs, a title which means you cannot use
owner-occupant financing even if you live on the property.
The good news, though, it that as an owner/occupant and also as a landlord
you'll learn a lot about the practicalities 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
property. These are valuable lessons which can provide income and wealth over a
lifetime. In fact, many people who've become successful in real estate often
started with just one small property, owner-occupant financing with little down
-- and two to four units.
For details, speak with appropriate professionals. Lenders can tell you about
available financing; real estate brokers can provide information regarding
local rental patterns plus you'll want a pro to explain the tax benefits of
multi-unit ownership.