Johnny Rents - You Don’t

The One-upmanship Factor:
Get one up on Johnny. Cleverly buy a multifamily home instead of a single-family home and take Johnny’s money.

The Application:
You catch a quick glimpse of the fog burning-off outside the second floor windows of your company’s office in the SoMa area of San Francisco. You’re putting the finishing touches on your code and are about crank up your unit tests when Johnny walks into your cube with a Mocha Frappuccino in hand. You see, Johnny just got promoted in the QA department and has stopped by to shove his pay stub in your face. Johnny now makes more than you. But you don’t despair, because you have cleverly figured out a way to buy a home in this insane real estate market, and best of all, you’ll get Johnny to help pay for it. This makes you very happy.

You can skip the next background section ("The G2") and dive into the "The Tactics" to get to the meat of the strategy.

The G2:
Real Estate Agents
Real Estate agents look at an inexperienced buyer and thinks “let’s hurry up and flip this sucker so I can collect my commissions”. Their motives are not always in line with your own, especially if they are listing many houses and are looking to quickly dump a few. Make your real estate agent bend to your will, not the other way around. Demand that he/she only show you the places the meet your strict criteria and timeframe, and don’t settle for anything less.

No Down Payment Home Loans
Who has $120K (20% of $600K) laying around to apply as a down payment for their first home? Not everyone realizes you can get 100% financing for home loans now. You can then use some of that spare cash saved to pay the closing costs which can be as high as 6% of the loan (yikes!). This type of financing can be tricky. With most 100% financing programs there are actually two loans (one on 20% and one on 80%). The loan covering the 20% is at a higher rate and can (and probably should) be refinanced after two years. Nationwide programs vary, and most have short windows of availability. This is where a good mortgage broker with nationwide coverage can help.

Credit Score
Your credit score is obviously very important when attempting to buy a house. What most people don’t realize is that you can still buy a home with “bad” (fair) credit. It will just cost you more. The better your score the better your interest rate. A good strategy, especially when going after 100% financing, is to get on a two year credit improvement plan (see The Resource Pool) once you’ve closed your home - even if you have good credit. Improving your score will get you a better rate when it comes to refinancing your 20% loan component after two years.

Mortgage Brokers
A Mortgage broker is like a shade-tree mechanic in the middle of Bum*uck, Georgia you reluctantly have repairing car that just broke down on the highway. Bubba, the “mechanic”, gives you a quick sh*t-eating grin with his chewing tobacco stained teeth as he welds a 1986 Ford alternator bracket to your 2005 Nissan alternator bracket. You sense that something is not quite right. Bubba assures you that you’ll “be back on the four-lane in no time” as his pit-bull, Kudzu, takes a leak on one of your back tires. A sure sign you are not dealing with the “A-Team” is Bubba’s grease-stained t-shirt which reads “Britney Spears - Dream Within A Dream, 2002 Tour”. Shade-tree mechanics, as with mortgage brokers, vary in knowledge, experience and resources. There are no professional certifications required. Good ones bring a tremendous value to the table, bad ones cause you to end up worse than you were before (see The Resource Pool). When dealing with a mortgage broker, demand a discount. After all, you are coming to him and not the other way around.

The Tactics:
The good news is there are financing programs available to reduce or eliminate your down payment. The bad news is you have to qualify for the loan and ultimately cough-up the monthly payments. This is where the “clever” part comes in. What most people don’t know is you can qualify for a owner-occupied multifamily home just as easily as a single family home (as long as that multifamily home contains four units or less). Most multifamily homes are not much more expensive than single family homes. I’ve found a good search tool to help you find multifamily homes in your area so you can see for yourself (see The Resource Pool).

As the new landlord of a owner-occupied multifamily property, you get to apply your tenants' rent towards your monthly mortgage payment – making your remaining piece within your financial reach, especially if you also have a roommate in your unit. This is were Johnny comes in. You offer him a “sweet deal” to move into one of your units in your building. Every rent check you get from Johnny will then smell like ambrosia.

To qualify for a residential owner-occupied multifamily home you may be able to underwrite the loan using rental income as your source of repayment. Of course when considering buying a multi-family property you should work with a mortgage professional that is experienced in this arena. Also you should find a good conveyancing attorney with multi-family experience.

In addition to the traditional mortgage interest payment tax breaks (prorated on the unit you occupy), you will be able to take advantage of rental property tax write-offs such as depreciation. I’ve found a good spreadsheet template to help you do what-if (sensitivity) analysis on your rental property (see The Resource Pool). You should also consult a good tax account experienced with this type of property before committing.

The Resource Pool:
Improving Your Credit -- Beef up your credit score in 5 steps

Mr. Multifamily -- He mixes and matches the best nationwide multifamily loan programs with your specific profile

Multifamily Search Site -- Use the "More Search Options" feature and select the "multifamily" option

Downloadable Sensitivity Spreadsheet -- Analyze before you buy