Being able to afford on your own vs with tenants? - Multifamily

[Andrew Bissada]

I've heard that you should never buy a property that you cannot afford to pay the entire mortgage(from your W2 job income) if you were the only person living there.

But obviously that must go out the door once you scale and have more properties. So what about househacking multifamily(Duplex)?

For example, lets say (these are not real numbers, I just made them up for simple math):

You have 3k/month from W2 job

The property will in total cost $1600/month. Your (other) bills and any discretionary funds are budgeted to $1,500.

That means you are paying 3100 but you only have 3,000. 

BUT, you estimate to get 1200 in rent from tenants. So theoretically you pay 3100 but you now have 4200 because of the extra income from tenants.

Is this viable? 

[Chris B.]

It’s good that you’re asking questions and trying to understand this. It sounds like you are asking if you should purchase a home if your W2 is not sufficient alone to cover the mortgage. The answer is more complex than a yes or no based off your W2. The majority of American families don’t have more than a W2 for income. So for them it is a major factor and the simple answer is no, they should not make the purchase. W2 income only becomes somewhat less important as other steady income comes into play that can be considered. If this is your first property and you want to rent half of it out, that’s great. However a bank will see this as your first house and you have no experience renting and have no history of rental income so there is nothing to consider other than the W2 income. Income isn’t the only major factor. Your debt to income ratio, credit score, cash assets available and more are also considered. If you had 3 properties (and lived in 1 of them) and wanted to purchase a 4the property, then yes, along with all of the other factors, a bank would consider rental income. They would be interested in your current rental income and apply 75% of it to your counted income. In the end, your overall income, credit score, backup assets, down payment, debt to income level and much more are all still considered before you can get a loan. After 4 properties, adding additional rental properties gets even more challenging as the emergency reserves requirement increases. There are other types of loans that are based on the equity of the property and you need to put down maybe 30% so the lender isn't at risk as much and these may have higher interest rates but less restrictions.

Back to your question… I don’t think in general it is a good idea for someone with no experience to obtain a mortgage that is more than their W2. Can they pull it off? Sure it’s possible to pull it off and succeed nicely. I’m speculating it’s not likely though. If you don’t have decent emergency funds, what will you do when you are laid off from your W2 or have a major medical problem that is both expensive and takes you out of work. The bank does consider and factor in these possibilities. You should also.

In the end, you have to take some risk to make money.  Just be smart about your choices.