How to Buy A Half-Priced Home in Menlo Park

Editor’s Note: Brian Ayer is a Realtor with Intero Real Estate Services, who provides full residential (single family to four unit) services in the San Francisco Bay Peninsula. While the majority of his business has been owner-occupied single family homes, his first purchase, a duplex in Redwood City, sparked a passion for small building residential investments.

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Owning a home is a goal that many people hope to one day achieve, but is also one that can be just out of reach – especially in the Bay Area. Luckily there is hope.

The Conventional Thinking

Most home buyers seem to be looking for the same thing: a three bedroom, two bath home, and end up competing for the same few properties. In Redwood City, these homes are usually priced between $600,000 – $900,000, depending on the neighborhood. Taking the average ($750,000), your monthly payment with 20 percent down for a single family home would be around $4,221* including taxes, insurance, etc. Don’t like that figure? Keep reading!

Change Your Thinking, Lower Your Payments

What if we turn this property into a duplex with a three bedroom unit in the front and a two bedroom unit in the back? There are FAR fewer people looking at that type of property, and generally you can get something in the $600,000 - $900,000 range, again depending on city and neighborhood. Take into consideration that you can rent the back unit for roughly $1600 month, and suddenly your monthly payment (after subtracting the rental income) then plummets to about $2621* a month, cutting your expense by almost a half!

Better yet, let’s increase our unit count to FOUR (any multi unit property with two to four units is still considered residential property) and the numbers work out even better. Assuming you collect a conservative $1200 a month for each of the three rentals, your monthly payment is now $621. Compare that with your neighbor’s $4221 payment on their three bedroom single family home and you can see why living in a multi unit building suddenly becomes appealing.

The Gift that Keeps on Giving

The monthly figures above are calculated as pre-tax monthly payments. Now let’s talk tax deductions* ever so briefly. On a single family home you can deduct your mortgage interest and your property tax. On a multi unit (2-4 units) residential building, you can still deduct your mortgage interest and property taxes, but you can also deduct any operating expenses, including insurance, gardener and maintenance/repairs for the rental portion of the property as well as depreciate the rental percentage of the building. This can lead to some big savings.*

Leverage

One of the biggest advantages to owning rental property is leverage, meaning you can buy and have the full benefit of a large asset (in this case a $750,000 building) with putting only a fraction of that amount as a down payment.

For example, you buy a four unit building for $750,000 with 20 percent down. You are living in one unit and renting the other three and have monthly payments of $621. Once you satisfy the residency requirement you move out and rent the fourth unit. With the additional rent you are collecting $579 a month in cash, which over a year totals almost $7000 in profit before any tax deductions!

Divide that amount by your initial investment of $150,000 and your return on investment is more: almost 5% per year, excluding tax deductions and the property’s appreciation - compare that to the rate you can get on a savings account lately and you can see how the savings just add up!

Twenty Percent Down? Are You NUTS?

To most people this amount of cash is not a possibility. If you don’t have access to these resources, there are programs which require as little as 5 percent down payment - consult your preferred lender to review all programs available.

The Catch: You Have to Work to Make Money

You are responsible for your rental property, if the sink (or worse) clogs, if the roof leaks, or (heaven forbid) if your tenant doesn’t pay their rent. You are also responsible for cleaning the unit between tenants, making any necessary repairs or upgrades, and advertising to find replacement tenants, when needed. Living on the premises makes these items that much easier, but hiring a manager (when you aren’t there) can relieve that responsibility.

Weigh the Options

Managing rental property is not for everyone, but with some hard work and risk management you are bound to have many good experiences. If do you decide you can handle the work, then this trick of getting others to pay for your investment might just be the best kept secret for the beginner investor.

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* All figures and calculations included in this article are ESTIMATES and are purely for the purpose of this article. Please consult your Realtor® for property information, financial advisor for tax information and attorney for legal advice. The author is a Realtor® and is happy to consult on those issues, but does not offer advice for tax or legal questions.

Contact info:

Brian Ayer

bayer@interorealestate.com

www.650pro.com