A Mortgage Secret For First Time Buyers It Can Pay To Buy More

A Mortgage Secret for First-Time Buyers: It Can Pay to​ Buy More
It's not easy to​ buy a​ first home,​ so here's a​ suggestion that may be surprising: Instead of​ buying one residence,​ buy several .​
What I'm suggesting has nothing to​ do with late night infomercials or​ books that promise fast and easy wealth from real estate .​
Instead,​ many first-time buyers can benefit from an​ interesting quirk in​ the​ mortgage system .​
When you​ hear people talk about real estate financing they generally divide mortgages into two categories; loans for owner-occupants and more expensive and tougher loans for investors .​
Investment financing is​ for buyers who do not physically reside at​ a​ property .​
Owner-occupant loans are for homes,​ the​ places where we stay at​ night,​ the​ phone rings and the​ car is​ parked .​
But there's a​ wrinkle:
Owner-occupant financing with little down and low rates is​ typically available for the​ purchase of​ more than a​ single-family house .​
Normally you​ can get owner-occupant financing for properties with one-to-four units as​ long as​ you​ use one as​ your prime residence .​
In other words,​ your status as​ an​ owner-occupant allows you​ to​ buy more than just a​ house or​ condo .​
You can actually buy property that produces rent and increases your tax deductions .​
When you​ buy properties with two-to-four units the​ world of​ real estate financing changes .​
Lenders will apply most of​ the​ rent to​ your income for qualification purposes .​
This means you​ can borrow more -- and also that you​ can offset loan costs with the​ rents such properties produce .​
Suppose you​ buy a​ property with four units .​
You'll live in​ one and rent the​ others .​
Each of​ the​ three rental units has a​ fair market rental of​ $1,​000 .​
In this situation you're likely to​ get two benefits .​
First,​ the​ lender will count some portion of​ the​ rent -- say three-quarters -- as​ income for you​ when determining your qualification standards .​
In other words,​ $2,​250 a​ month will be added to​ your income .​
($1,​000 x 3 units = $3,​000 .​
$3,​000 x 75% = $2,​250)
Why $2,​250 and not the​ whole $3,​000? Because the​ lender assumes you'll have vacancies,​ repairs,​ insurance,​ taxes and other costs for the​ rental units .​
The lender also assumes something else: For tax purposes,​ three-quarters of​ the​ property in​ this example will be investment real estate .​
When reporting your income taxes you'll list your rents and costs for these units .​
One of​ these costs will be depreciation,​ an​ accounting device that will lower your taxes but take nothing in​ cash from your pocket .​
When lenders see depreciation they add back that cost when looking at​ your monthly income .​
The result is​ that your effective monthly income for loan qualification purposes will increase even more than $2,​250 in​ this example .​
Buying two-,​ three- and four-unit properties can make great sense,​ especially for first-time buyers .​
You'll have help meeting monthly mortgage payments,​ especially in​ the​ first few years of​ ownership -- the​ time that's often the​ most difficult .​
Later on,​ if​ you​ elect to​ move you​ can sell the​ property or​ you​ might choose to​ keep it​ and just rent out the​ unit had been your residence .​
As with all investments,​ neither annual income nor rising property values can be guaranteed .​
Some owners may feel uncomfortable having tenants so close and there's always the​ potential for insufficient rents,​ excess vacancies and big repairs .​
Also,​ beware of​ going too far .​
While up to​ four units is​ okay,​ five units automatically classifies the​ property as​ investment real estate under the​ guidelines for most loan programs,​ a​ title which means you​ cannot use owner-occupant financing even if​ you​ live on​ the​ property .​
The good news,​ though,​ it​ that as​ an​ owner/occupant and also as​ a​ landlord you'll learn a​ lot about the​ practicalities of​ real estate investing .​
Real estate ownership requires ongoing maintenance and oversight .​
As an​ owner-occupant with a​ few units,​ you'll learn on​ the​ job about making repairs,​ dealing with tenants,​ hiring contractors and maintaining property .​
These are valuable lessons which can provide income and wealth over a​ lifetime .​
In fact,​ many people who've become successful in​ real estate often started with just one small property,​ owner-occupant financing with little down -- and two to​ four units .​
For details,​ speak with appropriate professionals .​
Lenders can tell you​ about available financing; real estate brokers can provide information regarding local rental patterns plus you'll want a​ pro to​ explain the​ tax benefits of​ multi-unit ownership.
A Mortgage Secret For First Time Buyers It Can Pay To Buy More A Mortgage Secret For First Time Buyers It Can Pay To Buy More Reviewed by Henda Yesti on August 28, 2018 Rating: 5

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