If you’re searching for your first home, buying a multiunit property, like a duplex, can be an excellent investment. Many buyers will have a preference of living in a condo or a single family home, but you may also want to consider buying a multiunit property, which can give you a bit of the best of both worlds.
The biggest benefit to buying a duplex over a single family home is that you own the property, but you have one or more people contributing to the mortgage payment every month. It’s kind of like having a roommate, except you don’t have to share a bathroom or a kitchen with them. A tenant, and their rent, can alleviate pressure on that monthly mortgage payment and will also help you pay down your loan more quickly. If you’re right on the border of being able to afford a home in the area, this is one possible way you can do it, and stay within your budget.
Since you own the place, it also gives you some flexibility with your living space and your budget. Are both units the same size? Does one have backyard access or more privacy? You can choose which space you want to live in and rent the other one out. On the other hand, if money gets a little tight or you want to save, you can easily move into the less desirable unit and reduce your monthly costs. You definitely can’t do that with a single family home or a condo.
I’m not going to sugarcoat it: managing a property with tenants is a lot of hard work. But it can be rewarding creating connections with people in your community and making sure their living space is comfortable. You’re also gaining invaluable experience as a homeowner, investor, and landlord.
Now let’s get into the numbers. That’s where some of the biggest benefits lie. Buying a multiunit property will mean that you will build equity faster. In Redwood City, you could buy a condo, town house, or single family home for $800k with 20% down and have $4k monthly payments. Or you could buy 2-4 units for $1.6M with 20% down and pay less than $4k per month subtracting your rental income. At $800k with 20% down, you're going to be paying down your loan by about $12k per year. At $1.6M with 20% down, you're going to be paying down your loan by about $24k per year. If you're making biweekly payments, you can expect to pay even more down under both scenarios.
Right now, you have a significant advantage in buying a 2-4 unit property as your primary residence that you'll most likely never have again. You can buy a property with 20% down and get an interest rate in the 3% range whereas someone else buying the same property strictly as an investment property would have to come up with 25-30%+ down and have an interest rate that's 0.5-1% higher.
With all this in mind, considering a multiunit property isn’t a bad way to get your foot in the door to the Bay Area real estate market. If you decide to buy 2-4 units with the intent to keep it long term, and then buy a single family home or condo down the road, you're going to end up coming out ahead.
Cliff Whearley has been a resident of Redwood City for 23 years. He is a Realtor at Dwell Realtors, Inc. and has been practicing real estate since 2007.
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