If you are thinking about getting into the landlord business, beginning early is an advantage. A term called house-hacking refers to buying a multifamily property with an owner-occupied mortgage. You then live in one of the units while you rent the other units out to other people. Beginning early means you get a longer time to accumulate a larger portfolio and you can increase the leverage on your first acquisitions by living in one of them.
Leverage is the use of other people’s money to finance an investment. The higher the loan-to-value, the greater the leverage which can increase the yield.
For example, a $200,000 rental property with an 80 percent LTV at 4.5 percent for 30 years producing a 16.88 percent before-tax rate of return would increase to a 23 percent return on investment by increasing the mortgage to 90 percent. In today’s market, a typical down payment on an investment property is 20-25 percent but, in some cases, a higher loan-to-value is possible.
Owner-occupied, multi-unit properties with two to four units, allow a borrower to occupy one of the units and rent the others out. The cash flow from the rental units subsidizes the cost of housing for the unit occupied by the owner. VA will guarantee 100 percent of the mortgage for eligible veterans, while FHA will loan up to 96.5 percent for qualifying borrowers.
If you purchased a four-unit property, owner-occupy one unit and then rent the three other units for $800 a month each. If you got an FHA loan, you could live for roughly $355 a month after you collected all rents and paid all expenses. Now if you lived in the unit for two years and then decided to rent it out for $800 a month, the cash flow would rise to $4,800 a year with a before-tax rate of return of 30 percent based on a 2 percent appreciation.
| Occupy 1 unit | Rent all 4 units | |
| Gross Scheduled Income @ $800 monthly each | $2,400 | $3,200 |
| Cash Flow Before Tax | $4,59 | $4,861 |
| Before Tax Rate of Return | 20.77% | 30.56% |
As an investor, rental properties offer a large loan-to-value mortgage at a fixed interest rate for up to 30 years while your asset appreciates and gives you tax advantages. As a real estate investor, you will have more control over it than any other investments out there.
You could consider rental properties an IDEAL investment where each letter of the word is an acronym for the benefit it provides. It provides Income from the rent payments that other investments don’t have. Depreciation that works as a non-cash deduction from income that increases cash flow. Equity building that occurs as you make monthly payments. Appreciation that happens over time as the value of the property increases. And L which stands for leverage explained previously in this post.
You may qualify to buy another four-unit property as an owner-occupant before you will need to begin using an investor’s down payment or loan products. You will need to make sure that there is at least 30 percent equity in the existing property to use the new rental income from the unit you previously occupied. There may also be a stipulation that you have lived in the unit for at least one year. If you can qualify for another owner-occupied property, you will own eight units all increasing in value as your mortgages decrease each month.
By becoming an owner and a real estate investor at the same time, you can turbocharge your net worth. To learn more about becoming an owner-occupier rental investor, contact me at (703) 303-4010 to schedule an appointment.
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