Multi family or single family

[Jacob Butler]

I plan on using a VA loan to buy my first (of hopefully many) house soon, I want to turn this property into an investment property after about a year residing inside it, should i be more focused on just getting the best deal i can? Or should i leap onto a duplex that may have less resale value but much better cashflow?

[Kenneth LaVoie]

Here's a snippet about this subject I wrote some time ago: 

Two-family owner occupied

• Rental income from 2 BR: $650 per month or $7,800 per year
• Tenant pays electric, you pay heat, water, and sewer.

Expenses: 8% each for vacancy, repairs and management (even if self-managed)

• Vacancy $593 (based on national avg 8%)
• Repairs $593 (based on national avg 8%)
• Management $593 (based on national avg 8%)
• Capex reserve $390 (5% set aside for "big" repairs like roof, heating system, etc.)
• Sewer & Water $520 (avg for area)
• Oil $2,800 (avg for area)
• Insurance $700 (avg for area)
• Taxes $1,750 (avg for area)
• Mortgage $3,891

Total Expenses $11,830
Cash flow negative $4,030 per year or -$335.83 per month

So your total out of pocket for housing expense is about $350 a month. This includes mortgage, heat, hot water, insurance, taxes and repairs including a 5% capital expense savings account contribution for future big repairs. It also accounts for the other apartment being empty one month per year and factors in a $593 payment to you each year for managing the building (which is much easier when you live there!) If you want to make the numbers simpler, you can remove the management fee and bring it down to the bottom line. I like to keep it separate for reasons I talk about in my book.

Compare this with buying a single family home and living in it. Assuming you got a great 5% down, 3.5% fifteen-year mortgage, your payment alone would be $415 per month. Using "apples to apples" logic, let's use similar expenses and assume the following. The repairs and capex reserve are based on 8% and 5% of what your home would rent for if you weren't living in it. Vacancy and management can be taken out because you're not in the landlord business now, you're just a single family homeowner.

Single family home; owner occupied

• Repairs $614
• Capex reserve $417
• Sewer & Water $520
• Insurance $400
• Taxes $1,200
• Mortgage $4,980

Total Expenses $8,131 or $677.58 per month

Your monthly housing expense is double the cost living in a house vs doing an owner occupied two-unit scenario. Your total housing expenses with the duplex are less than just your mortgage payment on the house. Of course, there are pros and cons outside of price. You will be a landlord living on your own rental property, and your tenant will have much easier access to you. He can knock on your door instead of call, and every time he sees you walk out to your car to go to work, it might remind him of a minor issue that he'd never bother you with if you lived elsewhere. You'll have to set some boundaries. It's a very personal decision, but the math can be pretty exciting, especially when you're just starting out and every dollar counts.

4 unit owner occupied
Let's assume you decide to buy and occupy a four-unit vs a 2 unit. The building cost $100,000 and needed $20,000 work to be up to standards. (Notice I've priced the four-unit only 20k higher than the 2 unit. This is fairly typical in the B class (decent blue collar neighborhood) properties. As the number of units increases, emotion matters less and bottom line matters more in regards to price, and so the cost per unit decreases.) Let's assume there's one nice "owner's unit" then three 2 bedroom units each renting for $650. Tenants pay own electric, you pay oil, water, sewer. Let's also assume that because of owner occupation, you get great financing; the same as the owner occupied 2 unit in the earlier example. Oil, taxes and insurance will be a little higher, or course. Everything else is based on a percentage of gross rent. The analysis also includes a larger management fee to you of $1,722 per year.

• Rent: $650 per month x 3 or $23,400 per year
• Tenant pays electric, you pay heat, water, and sewer.

Expenses: 8% for vacancy, repairs and management (even if self-managed)

• Vacancy $1,722
• Repairs $1,722
• Management $1,722
• Capex reserve $1,076
• Sewer & Water $700
• Oil $6,300
• Insurance $1,200
• Taxes $2,000
• Mortgage Payment $4,864

Total Expenses $21,306

Cash flow positive $2,094 per year or $174.50 per month

 In exchange for putting yourself in the position of living on the same property as your three tenants, you've also put yourself in a position where all your basic housing expenses are 100% paid for. You also get paid $1,722 a year to manage a building you already own and live in, leaving you an extra $174.50 per month to spend, pay other other expenses, or invest elsewhere.