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What if you could buy a home, buy a rental and plan for retirement all at the same time? That’d be neat, right?  Turns out you can… buying a duplex (triplex or fourplex) and living in one unit can checked all of these boxes and more.

A topic near to my heart

This subject is near and dear to my heart — I’ve lived in two duplexes. Living in my plexes enabled me to acquire investment real estate with favorable financing and not a lot of money down. Subsidizing my house payment with rent helped me afford to buy in neighborhoods I couldn’t otherwise afford. I’ve moved on, but still own both properties. They’ve become a cornerstone in my retirement planning.

Read on and I’ll share some of the many benefits enjoyed by those who owner-occupy a duplex, triplex or four-plex…

Rental income

Perhaps the most obvious perk to living in a plex is the rental income paid by your neighbors. Rent from the tenants in your other units can subsidize your monthly payment.

When you write an offer, you’ll have the chance to ask for copies of current leases. Your lender will want a copy too. Note that you’ll be required to show one unit will be available for you to move into with 60 days of closing. If a unit is not already vacant, your lender will ask for proof a renter has been given notice.

Tax benefits from renting

Living in a plex comes with tax benefits, as well. Your author is not a tax expert — be sure you consult with a CPA or other tax professional. Your tax benefits for the portion of the property in which you reside are identical to those you get from a single-family home — you should be able to write off a proportionate amount of property taxes and mortgage interest, up to the current IRS limits.

The rented portion of your home is (from a tax standpoint) much like operating a small business. At tax-time, you will be required to report your income (rent) and expenses to the IRS on a Schedule E. The expenses eligible to be written off include taxes and mortgage interest, but also many other things: insurance, repairs, cleaning, utilities, gardening and more.

Additionally, the IRS allows you write off “depreciation”. When you put an asset into business use, the IRS allows you to deduct its value, spread out over time, as depreciation. The depreciation on the rented portion of your building, improvements you make to your building, land improvements (fences, sidewalks, landscaping) and personal property (appliances) can make for a fairly large “paper” deduction. Your CPA can help you set up depreciation schedules.

If, after deducting your expenses and depreciation, your rental unit(s) show a profit, the net amount added to your income and taxed just like wages. If your rental income shows a loss, you may be able to deduct some or all of the loss from your income and save on taxes. Note, however, that rental losses are considered “passive” and subject to certain limitations. Be sure and talk with a qualified tax expert about your specific situation.

Tax benefits upon sale

When you sell, a plex is, again a bit of a hybrid. The portion you lived in falls under the IRS rules for a primary residence (including the primary residence capital gains exclusion). The portion you rented falls under the rules for an investment property and will be subject to tax on the profit (capital gains) and a recapture tax on the depreciation previously claimed.

You may be able to minimize or avoid capital gains tax by moving from one unit in your plex to another. And the rented portion of your property may be eligible for a “1031” tax-deferred exchange. A 1031 exchange allows you to roll the proceeds from a rental sale into the purchase of a new investment property and defer paying tax on the profit.

The keys to limiting tax liability upon sale are planning record-keeping. Strategize with your CPA or other qualified tax professional to create a plan and set up systems to maximize the tax benefits from your purchase.

Partner up for savings

If the idea of a subsidized house payment sounds appealing but being a landlord isn’t your cup of tea, another option may be to form a partnership. Teaming up with friends or family to owner-occupy a plex can be a cost-effective way to buy — maybe at a lower cost than you’d each have buying a stand-alone home.

Some of the most amazing owner-occupied plex success stories I’ve seen have been partnerships. But I’ve seen a few cautionary tales as well.

Any partnership requires trust, and planning with regard to long-term and short-term consequences of co-ownership. Decision-making and sharing costs for improvements and repairs and exit strategies should be worked out ahead of time. An attorney or mediator can help with this process and even draft a formal partnership agreement.

Downsize to a duplex

If you are retired or planning for retirement and looking for ways to reduce your overhead a duplex purchase could be worth considering. Rental income could replace some of your wages and offset some of your housing expense. Downsizing  back into one of my duplexes when I retire could bring my own adventures in plex living full circle.

Financing Matters

Buying a plex purely as an investment takes a lot of cash, but when you make a plex your home the down payment required can be substantially lower.

A multi-unit property purchased as a rental typically requires a 25% down payment. But an owner-occupied multi-unit properties can be financed with a substantially lower down payment — as little as 3.5% down on an FHA loan.

Interest rates for rental properties can be 0.5% to 1% higher than those for owner-occupied properties. Buying a plex to live in lets you buy “bonus” rental units under the favorable rates you get when buying your home.

To qualify for owner-occupied loan terms, you must move into the property within 60 days of closing and live there for a year.

Duplex Vacation Home

If you want to have a second home and rental income too, consider purchasing a duplex as a second home. To qualify for second home loan terms, you must hold one unit for exclusive use, but may rent the second unit full-time or on a short-term/vacation basis. The rent you receive could make owning a vacation home more affordable than you thought. Duplex second home purchases allow the higher conforming loan amount ($580,150) and jumbo loan options are available, as well. Down payment options start at 20%.

Special appraisal report

Once you have an accepted offer, your lender will order an appraisal report. Multi-unit appraisals are on their own special form: a Small Residential Income Property Appraisal Report. This report is almost like two appraisals in one. First, the appraiser uses comparable sales to develop an opinion of the market value. Then the appraiser uses comparable rental properties to develop an opinion of the market rent for the property.

Most loans allow a portion of the market rents — typically 75% — to be added to your income, helping to boost the amount you can qualify to borrow. The 25% deduction is called a “vacancy factor” to allow for time a unit is empty and other operating costs (repairs, utilities, etc).

Financing options for plexes

Financing options for owner-occupied multi-unit properties include many of the same loans used to finance a single-family home — FHA, conventional, jumbo and (for veterans) VA loans. There are a few special rules to keep in mind for each.

• FHA – FHA guidelines  permit as little as 3.5% down on up to 4-unit properties. FHA’s maximum loan limits are higher for multi-unit purchases. You can look up the limits for any county here. Where I am in Multnomah County, Oregon the current limits are:

– 1 unit: $448,500 loan ($474,767 purchase with 3.5% down)
– 2 units; $574,150 loan  ($594,975 price with 3.5% down)
– 3 units: $694,000 loan  ($719,171 price with 3.5% down)
– 4 units: $862,600 loan ($893,886 price with 3.5% down)

When buying a 3- or 4-plex a couple of extra rules come into play:

–  “Self-sufficiency” test – 75% of the appraiser’s estimate of market rents must equal or exceed your new mortgage payment. The self-sufficiency test can be a bit of a challenge, as appraisers are required to use entire buildings when seeking comparable rental properties. In most parts of the country the number of 3- and 4-unit properties is fairly limited and there is not a central database of rentals and rent. Strategize with your lender and realtor to manage this issue.
– Reserves – You must have at least 3 months of your new mortgage payment (including the loan, taxes, insurance and mortgage insurance) left over in savings after closing. Although FHA allows your down payment and closing costs to

• Conforming (standard) – Standard conventional loan options start at 15% down on an owner-occupied duplex purchase and 20% down on an owner-occupied triplex or four-plex purchase. As with FHA loan limits for conventional loans are higher as the number of units increases. The limits for most of the US are currently:

– 1 unit: $453,150  loan
– 2 units; $580,150 loan
– 3 units: $701,250 loan
– 4 units: $871,450 loan

• Conforming (Home 4) – In conjunction with Freddie Mac, Guaranteed Rate offers a special program starting atl 5% down for 2-, 3- and 4-unit purchases — “Home 4”. To be eligible your income must be considered “moderate” for the area in which you are buying ($81,400 in the Portland metro area) or the property must be in an with no income limit. Enter an address into this look-up tool to check income limits and eligibility for a specific property.

• Jumbo – A loan amount that exceeds the conforming loan limits is considered “jumbo”. Jumbo guidelines for multi-unit properties vary a great deal from one program to another. Down payment amounts for a jumbo duplex purchase loan options begin at 10%. Jumbo loan rules often (but not always) restrict the use of rental income to qualify — many either do not or only permitting rental income if you can prove you already have experience rental management experience.

Financing improvements

Most multi-unit properties have been previously been held for investment. A little deferred maintenance and wear and tear from prior renters are not unusual. If you find yourself interested in a property that needs some upgrades and want to tackle them right away, a renovation loan. The FHA 203(k) and Fannie Mae HomeStyle renovation loans allows you to finance improvements in with your purchase.

DIY improvements

When living in my own duplexes, I found having the time to chip away at improvement over time to be a huge benefit. Renovating a unit in a rental property usually means keeping it vacant and missing out on rent. Renovating my own space, avoided the “cost” of lost rent.

Let’s brainstorm!

If any of this has captured your imagination or you were already mulling a plex purchase and want to to take the next step, please call (503-799-3711) or email (juleef@rate.com) or apply online (www.rate.com/juleef). We can discuss your plans and come up with financing options to fit. And of course, I’m always happy to take off my lender hat, share my personal experiences in plex living.

Guaranteed Rate, Inc. is a private corporation organized under the laws of the State of Delaware. It has no affiliation with the US Department   of Housing and Urban Development, the US Department of Veterans Affairs, the US Department of Agriculture or any other government agency.
Guaranteed Rate does not provide tax advice. Please contact your tax advisor for any tax related questions.
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