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Published 5 June 2018
Homebuyers are inherently payment conscious. Their typical mantra is “the lower the better.” To that end, some purposefully seek out homes priced at the lower end of the spectrum. Few are aware that there’s another and sometimes even better approach to achieving a low monthly payment: Buy a property that generates income.
To illustrate how purchasing a two, three or four-unit income property can help buyers reduce their monthly housing obligation, I turned to statistics from the Las Cruces Association of Realtors. According to association records retrieved on June 4, a total of 178 Las Cruces area single-family homes sold for a price of $120,000, or less, through the first five months of this year. The average sales price was $81,185.
During the same period, buyers snatched up a total of seven duplexes. When averaged, the numbers revealed that the typical two-unit income property generated income of $625 per month per unit, or $1,300 per month, and sold for $136,000. So how can purchasing a property for $136,000 result in a monthly payment that’s lower than the payment associated with the purchase of property valued at $81,185? It’s easy. Have the tenants pick up the bulk of the tab.
The key to making the plan work is FHA financing, which is available to owner occupants of two-to-four unit multi-family properties. The interest rate and down payment requirements for two, three, and four-unit properties are the same as they are for single-family homes — as long as the borrower lives in one of the units. As of June 4, the required down payment was 3.5 percent of the purchase price, and the annual interest rate was hovering in the vicinity of 4.75 percent.
In our scenario, the purchase of a $81,885 home would require a down payment of $2,866 (3.5 percent of $81,885), plus closing costs of approximately $3,000, for a total cash investment of around $5,866. The monthly payment, including principal and interest, property taxes, plus homeowner’s and mortgage insurance, would be in the neighborhood of $575.
The down payment on a $136,000, two-unit property would be approximately $4,778 (3.5 percent of $136,000) plus $3,000 in closing costs, for a total investment of approximately $7,778. The total monthly payment on the duplex would be approximately $950, including taxes, insurance and mortgage insurance. In the end, the cost to acquire the average duplex would be around $1,912 more that it would be for the average $81,885 home, and the monthly payment would be $375 more that it would be for the house.
The major benefit to purchasing the two-unit income-producing property is that the remaining unit would generate income of $625 per month. When subtracted from the $950 monthly payment, the rental income offsets all but $325 of the borrower’s monthly obligation. While the numbers are fairly straightforward, there are some important elements to take into consideration. What if the property is vacant for a short time? How about repairs? Then there’s the income tax on the rental income.
On the positive side, owners may save on taxes by deducting from the rental income depreciation of the building and repair expenses. Other positive aspects of using FHA financing are that all or part of the borrower’s down payment and closing costs can be in the form of a gift from a relative or other approved entity, and a large portion of the rental income can be added to the borrower’s monthly income for qualifying purposes.
If a low monthly payment is on your wish list, this approach may be just what the doctor ordered.
See you at closing!
Gary Sandler is full-time Realtor and owner of Gary Sandler Inc., Realtors in Las Cruces. He can be reached at 575-642-2292 or gary@garysandler.com.
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About Author
Gary Sandler
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