Need Advice on our first home - Posted by Frank Notaro

Posted by Craig (IL) on February 16, 2002 at 10:04:18:

I did what you are looking to do. I live in a 3-unit that was actually built as a 4-unit, with what would have been 2 units in the back, off the street, has designed as a single, owner?s unit. It?s much better appointed that the front 2 units which I rent. I?m here to stay. But, more space for me means less rent to collect which means I didn’t have positive cash flow initially. One additional problem I have is keeping the neighbors happy (MY neigbors, too, remember) all living in single-family homes in a neighborhood where everyone except my renters own their own homes. Such people don?t care for ?renters? and this leads to social problems and a greater need fro me to screen prospective renters if I don?t want a lot of calls.

Finding a 2-, 3-, or 4-unit to live in and rent out the other units is considered a great way to start. You are also being very astute by coming to this site to look before you leap. You learn about REI, about landlording, as well as find a first home for oneself with lower-than-normal out of pocket mortgage payments. There is, however, a trade-off between your costs and quality of place and area you will be living in. Multi-units are often in less desirable areas, or if you find one that is in a moderately nice neighborhood, there could be a zoning problem–be sure to check zoning before you buy. Since you would plan to move in a few years, anyway, you might place finding a certain area further down your list.

Also check parking ordinances and make sure your place meets those. Check water run-off. Check whether gas/electric are separately metered for each unit; if not you can be sure that you will be paying for inconsiderate use of those utilities.

A poorly designed properly on a busy intersection, not necessarily residential in nature will attract one type of renter (you can imagine what kind?do you want these for neighbors?), a nice place in a nice area a different kind of renter. One-bedroom units tend to have higher turnover rates. Three bedrooms places will most often attract families with children. Apartment units usually have higher turn over rates than single-family homes.

About cash flow. A second trade-off for living in one unit and renting the rest is that it is unlikely that you will be able to find a place to your liking that will provide enough rental income to pay PITI + maintenance costs. I don?t know your area, but if home values have been going up recently in your area, it is unlikely that rental rates have kept pace. Rather than expecting renters to pay everything, consider acquiring a place that with negative cash flow, but at level you can afford. If you are renting, now, there?s a mark for you; anything that improves on that would be progress. If you can cash flow well enough to get buy you will make money next hear depreciation and other tax benefits. Then, of course you can expect benefiting from appreciation if you hold he property long term depending on the condition and other factors about the property.

You should have some cash in reserve when you first buy. Current renters may leave. (You need to have seen the rental contracts and now what their leases are up.) If there are month-to-month leases, plan in event those renters leave as soon as you buy. Even though you would inspect the place before you buy, you should anticipate there will be some things you?ve missed. When I bought, one renter left in 60 days, he paid all his rent, but he left me a mess to clean up. The other renters ran away 2 weeks before Thanksgiving. You now what it like trying to find renters that time of year? You can?t. Not only did thee people leave me a mess, I did not get the unit rented until February. It also cost me over a thousand buckaroos to rehabilitate those 2 units, new fridges, a new water heater, painting, and other repairs. I now have good renters in, they are good neighbors for me, pay on time, and actually maintain their living space better than I do for mine.

If you?re buying on a shoestring, have the properly professionally inspected. You don?t want the expense of structural problems (walk away from those) and there may be deferred maintenance. Also, find a friend that knows a lot about property maintenance (that t is unless you already know quite a bit) and have him or her look the place over before you contract for a sale.

Now on matters of financing. If you haven?t already, purchase a financial calculator; you can find one at Wal-Mart for under $20; play with it for a while to get an idea of what mortgage payments can be. I can?t advise you on how much to put down; that?ll depend a lot on what you can afford. However, 2 factors that most people don?t know about are advantages to paying up-front points and ARM loans. Points are in essence interest payments made up-front will less to pay later. 1 point = 1 percent of the loan amount. Payment of points lowers the interest rates and may improve chances of loan approval since lenders are getting profit now with less risk for them. If points reduce the interest sufficiently, you may want to do this. Points not only reduce the monthly payment required, but more of what you pay is applied to principle. Ask what a lender will give you; the, go back to your financial calculator and find out how long it will be before you get your money back. How you interpret this will depend on how long you intend on keeping the place. If your strategy is buy and hold, then the payment of points up front may be a good deal?you will pay less in the long run. If, however, you sell the place in a few years, the payment of points up front may not be in your interest.

Adjustable Rate Mortgages (ARM loans) offer an attractive interest rate the first rising to market rates later on. I have been told, though, I have not witnessed it personally, that if you make higher than minimum payment on an ARM there is a good chance the lender will not raise your rate. Lenders find it in their interest to keep good payers rather than risk good payers refinancing. Thus, you might take a 30 year ARM at a significantly lower rate but make a higher than required payment, you lender will not raise your rate the following year. If, for example, you paid 1/12th more each month , you ?d be making the equivalent of one additional payment per year. At that rate, you 30-year loan will be paid off in less than 24 years; you would have paid 23 early payments to eliminate about 90 payments later on?quite a bit of moolah!

Buying an living in a multi-unit has worked for me and can for you, too. I since have acquired more property so that my monthly cash flow now breaks even. I live rent free and enjoyu cash profit once my tax refund (considerable this year) comes in. You can, too and you can save for your next home. Best wishes.

Need Advice on our first home - Posted by Frank Notaro

Posted by Frank Notaro on February 15, 2002 at 22:01:04:

My fiancée and I are looking to buy a multi-family home in Central NJ. We want to live in one unit and use the rental income to help with the mortgage. We want to keep the home and rent out our unit when we move into a single family in 4-5 years. We also would like to buy other rental property. Since neither of us has done this before, we need some advice.

What should we look for when searching for properties? We look in the newspaper, Internet and have a real estate agent looking for us. So far, we haven?t found many properties that are very profitable and nice enough to live in. Should we concentrate on 2 families, 3 families or four? Should we look at 1 bedroom, 2 bedrooms or 3 bedrooms? Are single-family homes better investments?

We are also unsure how we should finance the home. Some people suggest only putting down 5 percent. This would enable us to keep more of our savings and allow us to buy our second home sooner. The drawback is the higher mortgage payment and the PMI insurance. The higher mortgage payment makes it more difficult to find profitable houses. Does anyone know a good way to estimate the cost of PMI insurance? Is there a formula? I?d love to hear different opinions on how much money to put down on a home. Finally, how much positive cash flow is enough? We realize that there are going to be expenses for these homes and we want to make sure that we don?t lose money. Is there a number that I should look for before I make a deal? We are looking to make money from positive cash flow as well as equity.

I?d also like to know where we could learn more about real estate investing. Can anyone recommend a book or club? (We live in Central New Jersey)