Multifamily homes re-emerge as an option

Your Money staff reporter

Finding roommates to cut your housing bill is a natural solution when renting.

Not as obvious: sharing space in a home with renters to qualify for and afford a mortgage.

The strategy is nothing new. Homeowners have for years bought multifamily homes--anything from two-flat to four-flat units--and lived in one portion while renting out the other floors.

But in the last few years, developers and landlords have turned many multifamily properties into condominiums.

According to the National Association of Realtors, 34 percent of multifamily homes sold in 2005 were condo conversions.

Condo-mania has allowed buyers to secure their own place at a price often cheaper than a single-family home. Low interest rates and creative financing tools have helped.

Today, however, as mortgage rates rise and home prices cool off, it may be worthwhile for first-time buyers to return to old strategies and consider purchasing a multifamily home.

Why you may want to be a landlord

-- For one, multifamily homes may sell for nearly the same price as a single-family home. The average sale price of single-family homes in Chicago, for instance, was $337,000, through the end of July, according to James Ascot, president of Ascot Realty Group. Multifamily homes: $365,000.

The rush to convert apartments into condos has driven prices up in some markets. At the same time, with so many condos, developers have become increasingly wary of adding to the supply, creating less competition now for multifamily homes.

-- You may have an easier time qualifying for a mortgage. Banks consider a percentage of the rental income you expect to make, typically 75 percent, and add that to your gross income, said Alex Chaparro, president-elect of the Chicago Association of Realtors.

"It gives you a boost to qualify for a little more," he said.

Don't forget that your property taxes, insurance and maintenance costs will be higher. But in some cases, rental income will still shave off a majority of your mortgage expense each month.

Plus, Chaparro said, "Every so often, the rent will go up."

-- Even though your expenses for a multifamily home may be higher, you do get some tax relief for the extra outlay. Anything from mortgage interest and utilities for the rental units to all of the repairs you make is tax deductible.Still, while owning a multifamily home may reduce your housing costs, there are no promises--and some serious negatives to consider before you commit.

Why you may not want to be a landlord

-- In the middle of the night, if a toilet starts to overflow, your tenants will call you.

"You're the landlord now," said Bridget McCrea, author of "The Home Buyer's Question and Answer Book," (Amacom, $16.95). "Your tenants will call you with anything and everything."

And if you aren't handy at plumbing or other maintenance tasks, or you don't have the time, hiring experts can be costly."Be sure to hire a good inspector before you buy and know what you're getting into," McCrea said. "Tenants won't rent if the fridge doesn't work and there's tile ripped up from the floor."

-- Secondly, it's likely your rental won't be occupied all of the time. Even though the rental market is tightening, the apartment might sit empty for a month or two in between tenants--meaning no income to help you with mortgage payments during that time.

If your cash flow is too tight to handle the temporary loss of rent checks, then you may not be the right candidate for a multifamily home.

-- Finally, although many people use a multifamily home as a way to build equity and eventually buy a single-family home, it takes time.

"Because of the extra wear and tear, multifamily homes don't appreciate in value as quickly," McCrea said. "It also takes longer to sell because there's less demand for them."

But given that multifamily homes may come equipped with a basement, yard and garage--as opposed to living in one of many condos in a large complex--you may want to stick around for a while anyway.

"You get a single-family feel," Chaparro said. "People have looked at that, and the mortgage help, as an exciting thing."

E-mail Carolyn Bigda at

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