My First Property – Why I Purchased a Multi-Family House Instead of a Single Family Home

The next step in my journey to financial freedom starts with investing in real estate.  Below is a summary of why I chose to invest in a multi-family home rather than a single family home.  My offer just got accepted on a duplex property in Ventnor, NJ.

Choosing Multi-Family over Single Family

During the 3-year span of listening to podcasts, reading books, and articles online I stumbled on a chapter within Tools of Titans by Tim Ferriss about Arnold Schwarzenegger.  In short, Arnold Schwarzenegger first became a millionaire not from bodybuilding or acting, but rather from real estate.  When he moved to the United States he had to figure out a way to make money without working a 9 to 5 job so he could spend 6 hours a day in the gym.  He found this through real estate.  The first thing he did was purchase a 6-unit multi-family apartment complex.  The 6 plex generated enough passive income so Arnold Schwarzenegger did not have to get a job.  He explained his rule in an interview with Graham Bensinger…”Before I ever buy a condominium or a house, I have to have an income property first”.  This quote resonated with me and changed my mindset.

It instilled the idea that I need to buy multi-family homes before I purchase a single-family house.  I realized if I could purchase a multi-family home, tenants would pay a portion of the mortgage if not all of it.  I could also convert the property into a rental income property long term when I eventually move out.

Reduce Your Mortgage Payment:

Some would argue that you can eventually turn your single family home into a rental income producing the property, but if you want to purchase the home and rent it out immediately you will have to put down 20-30%.  If you want to purchase a home with as little money down as possible you have to occupy the property as your permanent residence for at least 12 months (most common).

If you don’t occupy the property you have to put 20%-30% down since it’s classified as an investment property.  Therefore you wouldn’t be able to purchase a single family home and collect rental income immediately unless you put 20-30% down.  This makes it much more challenging to purchase homes due to the more that is capital required.

Choosing a multi-family property you are able to live in the property while renting out the other units, reducing your mortgage cost out of pocket since your tenants pay you to rent.

Also, multi-families are easier to accumulate positive cash flow since there are more units under one roof.  Because of this it is also easier to manage since you have one roof to cover instead of multiple single-family homes.

Understanding the Return on Investment (ROI)

When looking for a house from an investor’s perspective you should have a set of rules that you follow.  For me, it was multi-family properties (2-4 units) and to follow the 1% rule.  The 1% rule states that you should only purchase a property where the potential monthly rent of the property is equal to or greater than the purchase price.  For example, the property I am under contract, I was able to lock in the purchase for $250,000 and I can rent the property out for $2,500 per month.  Finding a property that meets these guidelines will put you in a good position to obtain positive cash flow.  Let’s see the numbers below.

Looking at the numbers:

The purchase price of the house is $250,000 with the tenants in the upstairs unit currently paying $1,200 a month.  I can get $1,300 for the downstairs totaling $2,500.  Using the Rental Income Property Calculator (you can find this under the resources here) I was able to run the numbers and conclude that this could be a cash flow machine.  The calculator looks something like this.

Multi Family Duplex ROI summary

Notice I am only putting 3.5% down. Putting “3.5% down” means paying $3,500 up front for a$100,000 house.  In other words, it’s the loan to value of the property, in this case, it is 96.5% loan to value.  The less you point down the higher your mortgage payment.

However, due to the 1% rule, I am able to get positive cash flow even with paying little down, paying property mortgage insurance and expensive home plus flood insurance.  All said and done I expect my monthly mortgage payment to be around $2,209.  I should get $2,500 a month when I move out netting a positive cash flow of $291 per month.

Update (2/26/2019):  Learn why I refinanced to lower my monthly payment from $2,209 to $1,898.

As mentioned previously, I can’t purchase the house with as little as 3.5% down if I rent out both units.  So I will live in the first-floor unit and the upstairs unit will pay 54% of my mortgage!  Instead of paying rent for a property and not building any equity, I will have a duplex that allows my housing costs equal to $1,000 and I’ll have tenants helping me build equity.

Additional bright sides to this investment:

  • When I reach 20% equity in the property I can refinance the property.
    • With 20% in equity, I will no longer have to pay PMI (property Mortgage Insurance).
      • This will save me roughly $208.33 per month.
      • Assuming interest rates increase these savings may drop a bit.
  • There’s an opportunity to add value to the property
    • This property can use an updated kitchen with better cabinets and countertops.  This could potentially help increase the rent an extra $50-$100 for each unit.
  • Two Car Garage
    • The property has a detached two car garage that can be added to the lease for an additional rent cost.
  • Separate the water meters
    • Currently, the water isn’t separated for each unit so there’s an opportunity to split the water and have the tenants pay that as part of their lease, ultimately reducing costs.
  • Inflation over the long run.
    • Over time, it is expected (not guaranteed) that house values increase over time which will hopefully create a positive return on the investment (ROI).

How Do I Afford This?

A lot of people say “I can’t afford to buy a house”, well instead of “I can’t” think “How can I?”.  If you notice in the rental income calculator I only put 3.5% down on an income producing property!  Residential multi-family homes (2-4 units only, 5 units and up are considered commercial real estate properties) usually require 20-30% down, however with an FHA loan you are able to purchase a 2-4 multi-family property with as little as 3.5% down.

However, there are some rules to follow:

  1. You MUST occupy the home within 30-60 days of closing. If you do not move into the property within 30-60 days you are not eligible for a 3.5% down payment or FHA loan.
  2. You have to live in the house for 9-12 months depending on your mortgage agreement before you can move out and start renting your occupied unit out.

With FHA loans, I am able to purchase properties much faster than a conventional loan requiring a 20% down payment since I do not need as much capital.

Update: I was able to find a conventional loan that requires only 5% down on a multi-family owner-occupied property, which I refinanced to.  If I could do it over again, I would choose a convention loan over an FHA loan.

Real Estate Goals in the next 4 Years

Over the next 4 years, my plan is to purchase a multi-family home every 12 months.  When I am 30 years old I’d like to have 5 multi-family homes under my belt that are fully occupied generating positive cash flow.  In addition to the residential multi-family homes (2-4 units), I also started looking into commercial multi-family homes.  My future goal is to syndicate a commercial multi-family apartment complex ranging from 6-100 units.

If you have any experiences investing in real estate or questions about the post, please share your below.

About The Author

Kevin Mathers

A washed-up hockey player, surfer, and husband currently working towards financial freedom and showing you how we do it as a couple. I started this blog initially as a personal finance blog but after getting married, Taylor (my wife and best friend) and I decided to switch gears into the travel world sharing our experiences with you along the way.

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