Duplex multifamily pros and cons

[Virgilio Garcia]

Hello all, 

I wanted to get some advise and opinions of multifamily homes as a primary residence and investment ( tenant pays off mortgage).

i have an idea where i would go out and find a motivated seller with a 50% occupancy where i can take up the other 50% becoming a landlord.

I know this is going to take some hard work and i am willing to put in the work. I want to weigh the pros and cons, best case scenarios and worst case scenarios. 

Thank you all. 

[Logan Allec]

@Virgilio Garcia

"when you closed on your 4 family, was it already occupied?"

Yes, except for the one unit that I am currently living in.

"Do you have/had a property manager?"

No.  I don't really see a point of paying somebody else 8% off the top when I literally live on the property.

"In a scenario where you have the 3 units occupied and paying full rent, do you clear your debt services/loan, and do you cash flow afterward?  Do/did you ever have to come out of pocket to keep up to date?"

Yes and yes, and I will give you my numbers below.

Monthly Rent Unit 1: $675 (hasn’t been raised in 15 years)
Monthly Rent Unit 2: $995
Monthly Rent Unit 3: $1,035
Monthly Rent Unit 4 (my unit in which I rent out the bedroom): $650
Total Monthly Rent = $3,355

Monthly PITI = $2,862

Monthly Utilities = $208

So that leaves about $285 per month for repairs and other operating expenses. Granted, this does not sound like a lot, but when you take into account that I used to pay somebody else $600/month for rent, and now I pretty much get “free rent” in Unit 4, that bumps my monthly economic increase per month to $885 ($10,620 per year) less repairs, maintenance, vacancies, advertising, etc. (let's call these "other costs").

Let’s say I actually spend $10,620 per year on other costs (this number is conservative by the way). All else being equal, a year from now I will be in the same position, cashflow-wise, as if I had been renting from somebody else for $600/month that is, I would have paid out-of-pocket an average of $600 per month or $7,200 per year. But consider the four points below (wish these could've been indented as a numbered list but it looks like today's BP site updates aren't having it).

1. $625 of that monthly PITI goes to principal. That means that even though cashflow-wise, I am in the same position as I would have been by renting, I have increased equity in the property (net worth) of $7,500.
2. Unlike rent, everything else I pay for is a tax deduction with the exception of the portion of some expenses attributable to my personal use of the property (the 12.5% of the property I use myself) rather than my business use of the property (the 87.5% of the property that I rent out to others). Regardless, when you add the deductible expenses to my depreciation deductions, I’m ending up with over $10,000 of tax deductions in excess of rental income on this property that I can apply toward other forms of passive income (such as other rental income). I’m in the 28% tax bracket for fed and 6.7% for California (my actual California tax rate is 9.3% but the 6.7% is net of federal tax benefit for state taxes paid), leaving me with a total tax savings of 34.7% x $10,000 = $3,470 (and this number is low because the $10,000 of tax deductions in excess of rental income is a low number).
3. Combine these $3,470 tax savings with the $7,500 increased equity and you got $10,970 in annual economic increase by house hacking vs. renting for $600/month.
4. There’s appreciation potential over the next X number of years that I hold the property, especially where I live in California.

For the reasons above, if you’re currently renting, this is a no-brainer.  Listen, if you do nothing else in real estate, you will have succeeded by getting into a fourplex in a developing area as a young man with only 3.5% down. Assuming the rents cover your expenses, in 30 years when the mortgage is paid off, and you’ve done the smart thing by raising the rents over the years, you will be sitting on a multi-million-dollar asset that you own free and clear that cash flows thousands of dollars per month at the cost of a measly $15k or so out-of-pocket 30 years prior. I can’t think of any better way for people to prepare for their future so early on in life with so little cash out-of-pocket. Run the numbers and see for yourself.

TL;DR Buy a fourplex!