2 Unit Multi Family to Live Rent Free. Good idea or not?

Question

I'd like to bounce this question off the forum. I'm thinking about leaving my $1,700 per month studio in Manhattan to live almost rent free in the immediate suburbs. The house in question is on for $435,000, 1,750 sq ft, 2 units (one 2 br & one 1br), $12,400 taxes, $2,500 insurance, no immediate work needed (house is completely updated) but estimating annual maintenance at .75 - 1% of sales price. The house will be mortgaged 50% and I will live in the smaller unit and rent the other out for atleast 2,200 per month (area is very desirable and units are rented within 3 weeks). That is approx $2,700 in monthly mortgage, insurance, property tax, and estimated maintenance cost, meaning I will only need to pay $500 per month. If I were to move out in 5 yrs and rent both units(smaller unit will rent for $1,400), the return on the down payment is a little over 5% and the cash on cash return is 3.9% with the mortgage and 10% after the mortgage is paid off with a post mortgage net cash flow of 23,000 annually (assumes 5% vacancy). From a pure investment standpoint this is a mediocre return with the mortgage, however the upsides are:

- I can save money as I will have an extra $1200 per month ($1,700 current rent - $500)

- I will avoid the current NYC income tax of 4% on my salary

-Benefits of mortgage tax deduction

-I can take a loan on the property to put 50% down on a $200k multi unit home in a college area nearby (pure investment property)

QUESTION; is this a good starter property given the low cash flow and mediocre return? Do the benefits outweigh the lower return or should I look for a 3 unit house ? Advice? Thanks all!

- I can save money as I will have an extra $1200 per month ($1,700 current rent - $500)

- I will avoid the current NYC income tax of 4% on my salary

-Benefits of mortgage tax deduction

-I can take a loan on the property to put 50% down on a $200k multi unit home in a college area nearby (pure investment property)

QUESTION; is this a good starter property given the low cash flow and mediocre return? Do the benefits outweigh the lower return or should I look for a 3 unit house ? Advice? Thanks all!

Pete Nater · Answer

I'm not a long time investor but from what I've learned, (and I've been studying my butt off) it might make more sense to put a smaller down payment and use the remaining capital to purchase other less expensive positive cash flow producing investment properties in a less expensive market(s). You could use that cash flow to supplement your pay down of the multi-fam (since the mortgage will be higher if you put a smaller down payment) but this strategy is a better way of leveraging the bank's money and not your own, and move you down the path of higher net worth, owning more investment properties, sooner, rather than later.

I recently purchased 3  positive cash flow producing turnkey properties in much less expensive markets. Message me if you want more info

Great thinking in getting out of the rental and into a multi-family. Good luck.

Adam Johnson · Answer

@Michael R. - great question.  In hindsight, I wish I had started out similarly way back when.  I would be much further ahead.

Personally, I like the concept, but based on a quick glance at your numbers as well as your own reluctance in the tone of how you worded your question, I think you already know the answer.  One thing I have learned is to trust my gut.  Your hesitation is your gut talking to you.

I would take a little more time, dig a little deeper, and find a no-brainer deal.  From experience, I like to always have 2 decent exit plans in case something happens that I didn't foresee when I entered into a deal.  What happens if your job changes in 3 years and you have to relocate or your commute becomes unmanageable?  With 50% down, chances are you could sell and clear the mortgage, but you may not see much of a return on your investment.

I think you are on the right track, keep going, but maybe not with this particular property if you are looking at this as an investment move.  I realize that if this is somewhere you will live for a while, emotion will come into play.

The "no brainer" deals are out there, but you have to look harder and turn over stones that haven't been turned over yet.  Your returns will be higher and I think you will be more satisfied when you look back.