An owner-occupied home is the biggest single financial mistake that most Americans make. If houses were sold on the stock market, the SEC would shut down the trading. If mortgage terms get any more Draconian, mortgage companies will need to start advertising them with Nigerian lottery style emails. That so many people consider their house an “investment” serves only to explain why most people are poor.
With housing costs continuing to escalate, there is no escape from the depressing cycle of rising home costs and rents that we find ourselves trapped in today. Desperate times require desperate measures and we may be getting to the point when it’s in your interest to consider options that were once reserved for real estate professionals. One word of caution before we dive into this topic; you’ll need to do a lot of research before attempting any of this and understand your local regulations.
Consider a Multi-Family Unit
Instead of a conventional house, think about a four-plex or multi-family unit. Live in one of the units, rent the rest and bank the extra cash for repairs and renovations. The closer to a large urban area the better. If it’s one located in the downtown area of a large urban center, even better. Most people snuff at that idea thinking they could never qualify for a mortgage but that’s the difference between commercial property and owner-occupied homes. The financing is based on the income potential of the property and, for as little as five percent down, you can buy a property that you can live in plus pays you cash every month. You’ll also discover that tax laws heavily favor landlords, particularly those carefully tracking and documenting expenses.
The downsides are that you’re required to keep up with the maintenance and find good tenants, which is harder than it sounds. You may also be in a position when you have bad tenants that damage the place or require eviction which is not fast or cheap and can take months in some jurisdictions.
Learning The Ropes
Being a landlord requires knowledge, commitment and at least some cash reserves. It also means learning to run the numbers and to be fairly brutal in your calculations. The good news is that buying a commercial property is far less emotional than buying an owner-occupied home. The numbers are the numbers and, if the unit is priced too high, you can use the numbers to bargain down the price. You can also get the seller to assist with the financing and closing costs. Many of the limitations imposed on owner-occupied homes do not apply to commercial properties.
Another thing to be aware of is there are fewer requirements for disclosure on commercial real estate. The people most successful in the real estate business have the longest due diligence checklists. Remember the lead in the water problem in Flint? Without due diligence you can end up buying past liability along with the property. You also don’t want to buy a multi-family property that needs major remedial work.
There is a reward for all this work. Even if your property is not cash flow positive, many times you can structure your expenses so you are living essentially rent free, at least on good months. Another bonus is, unlike an owner-occupied home, you are actually building equity with commercial property.
Most times I would not suggest the inexperienced and unwary consider multi-family homes but these are not most times. It’s somewhat ironic that being a landlord may be the best path for affordable housing for those sharp with a pencil and quick with a calculator.