On the heels of our discussion last week about the age-old rent vs. buy conundrum, I’d like to throw another option (wrench) in the decision making process of our North Conway real estate buyers.  When looking at the financial investment involved with buying a home it often makes sense to stretch a smidge and grab a multi-family unit.  Right now in the Mount Washington valley, there are over 30 of these properties for sale with list prices ranging from 65 to 600 thousand dollars.  When I purchased my first home it was a 2 unit building in Somersworth, NH and I paid a mere $112,000.  The truth is if you do a little homework and think it through, a multi-family might just be the path towards home ownership and the many benefits of an appreciating asset.

Sharon Dworkin Bell, senior vice president for multifamily and 50-plus housing for The National Association of Home Builders reports that the forecast of 208,000 multifamily residences in 2012 is well below the 350,000 units needed to maintain a balance in the market.  This makes it clear that duplexes and other multi-family dwellings are going to remain in high demand.  As our economy gains strength and more young adults are entering the job market, the demand will continue to strengthen.  This clearly bodes well for those who already own these units, but it is also a good indicator that you will have no shortage of tenants from which to choose or buyers should you decide to unload it.

When you start down the road to home ownership, one of the first obstacles is the almighty dollar.  How is your credit? Do you have enough of a down payment? Will you be able to pay your mortgage if you lose your job?  And although banks are slowly loosening the purse strings with more logical lending standards, the reality is you still need to be a good risk.  One of the nicest benefits to owning a multi-unit property is you have someone else contributing to your monthly bills.  This benefits you in two ways.  You have the post-purchase advantage of the rental payments coming in every month to help pay for the mortgage.  The other advantage to this is the banks will actually give you credit for this income prior to the sale.  When you are being qualified for the loan, a percentage of the anticipated income from rental payments is factored in to your monthly income.  This always increases your buying power and directly impacts the total amount you will qualify for.

The income generated from rental payments is a nice bonus, but should be carefully added to your budget.  Banks will typically use an occupancy rate of 75% when adding that income to your borrowed amount.  That means if you are expecting rental payments of $1,000/month for the other side of your unit, you should only budget $750/month.  This will help plan for transitional months between tenants and the occasional empty unit when you simply can’t find a quality tenant.  All of that said, it is also exciting to note that because the rental industry is so strong right now, vacancy rates and rental rates are both holding at great levels.  According to Rental Beast, a rental agency, the Boston-area vacancy rate for rentals is 3.7 % and rental rates have seen a 7% uptick over last year.

If the battle cry for real estate is “Location, location, location”, the cry for multi-family properties is “Tenants, tenants, tenants”.  The quality of the location of someone’s real estate and its impact on the value of that home has a direct correlation with the quality of the tenants you have renting from you and the peace of mind you will enjoy as a landlord.  The importance of references, both personal and professional, cannot be underestimated here.  I have had potential tenants provide their parents as their former landlords, I’ve had a women provide her “john” as a reference and I’ve even had someone give me a reference to a previous landlord that they skipped out on and to whom they still owed money!!  Clearly these folks were not putting their best foot forward but they made my decision process very easy.

I would strongly encourage you to be diligent in your research.  You’ll be able to rest easier at night knowing that you did all you could do to ensure the quality of the person who will potentially be your neighbor and a vital source of income for you and your family.  I think it is important to note that the “quality” of a tenant goes beyond their ability to pay on time.  A tenant that I enjoyed as a neighbor for over a year was late with his rent nearly every single month.  On the surface this would garner him not only a bad reference, but also an eviction notice.  Looking beyond the rent payment, I saw a hard worker, a single father and a good person.  He was also a skilled carpenter who helped out around the property, always called or emailed to warn me of the late payment, and he always paid within a week or so.  I would take a tenant like that every time over someone who did not respect my property, was loud or rude, yet paid their rent on time.  The lesson here is to look at the whole picture when evaluating your new neighbor.

Buying a multi-family property is a bigger risk than just a single family home.  You are not only taking on a larger debt load, but you are also partially relying on tenants to uphold their part of the deal and contribute to the overall expenses of the property, albeit indirectly.  If you can focus on the long-term and not worry about any month-to-month bumps along the way, your journey will be a more pleasant one.  Keep in the back of your mind that there is someone else helping you pay your mortgage and asking for nothing in return other than a roof over their head.  You should stand tall in the knowledge that because you were willing to take the risk, you are now living in an investment that will continue to pay dividends throughout your ownership.