Buying an Income Property to Live in
June 8, 2009 by Deyanira Bautista
Filed under Buying Real Estate, First Time Buyer
There is a fundamental difference between buying a property solely for investment purposes and buying it to live in it.
We all want to live rent-free. Having the revenues cover all of the expenses, including the unit we occupy. And while all of this is feasible, it is important to mention that certain factors affect this outcome: size of the building, revenues, etc. So let’s take a look at what we can expect when searching for a income property.
Buying a property as an investment alone
Your home is else where, but you want to buy as an investment. This is all a numbers game: a property that generates enough revenues to cover all the expenses and then some. The bigger the property (with larger units) the bigger the revenues, in this case you can expect to have expenses paid, plus a little extra at the end of the year. But this does not always occur with smaller properties such as duplexes or triplexes.
Buying an income property to live in it
You’re contemplating to buy, say, a triplex and you’re planing to live in it, your main concern does not go so much in:
After all expenses are paid; How much does this property gives at the end of the year? Chances are with smaller properties they would cover only the expenses.
If you’re living in it, and you only have one unit with tenants, it’s highly unlikely you’ll be making a surplus of money at the end of the year, much less going on vacation with property revenues.
Instead, ask yourself: How much does “your” portion of the mortgage represent?
For example:
Let’s say you’ve found a lovely triplex with 2 bedrooms on each unit, the asking price is $450,000. One unit is vacant and the two other units are rented at $850 (tenants pay their own utilities). Revenues of ($850×2) $1,700 a month OR $20,4000 (gross) a year.
Taxes, Insurance and other expenses a year = $4500. So the net revenues are: $15,900/year.
Your down payment is 20%, which translates into $90,000. Giving you a mortgage of $360,000 amortized over 35 years at 3.5%, your monthly payment is $1,482.58 OR $17,791.01 a year.
So far the revenues from the two units alone ($15,900) are not going to cover the mortgage ($17,791.01). BUT remember that we have not consider YOUR unit into the equation.
We know we’re missing 1891.01 at the end of the year to meet our costs. And that’s what your portion of the mortgage represents!.
After all the calculations, in this particular example, it will cost you $157.58 a month OR $1,891.01 a year, to live in this property. (Taken from $15, 900 – $17,791.01 = -1891.01)
How much are your comfortable with paying each month?
This is one of the questions I often ask to first time income property buyers. Having that amount in mind, and the max purchase price given by the lender, you can begin to do a search for a good property match.
Of course, we don’t always find such great properties with high revenues priced at the right amount. The condition of the building has a lot to do with your offer, and let’s not forget: your down-payment will affect the monthly and yearly mortgage expenses, and with that, the amount of money you will pay to live in your unit.
A while back, I wrote an article on Repossessing your income property, where it was discussed the terms and conditions when taking possession of one of the units, it’s full of useful information. I invite you to read it!
Posted by: Deya Bautista - Affiliated Real Estate Agent working as part of the McGill Immobilier team. Specializing in condos and revenue property in the metropolitan area of Montreal. For buying or selling contact Deya at: 514.917.7889 
Another problem that have been experienced by my wife's and my parents, the tenants skipped payment and there was absolutely no protection for the landlord. In these cases, they didn't pay rent for a few month and quitely moved out. Often, there is a lot of headache when you have tenants…
I agree with Ray: When you calculate how much you can afford to pay each month, be careful about tenants who sometimes won't pay for rent. It can change everything !
Great post!
I was wondering – Is it true that that banks will increase their available mortgage (above your current maximum lending amount) to the purchaser of a triplex, as (living in one of the units) 2/3 of the units will be income properties contributing to the larger mortgage?
I heard something like that, but have so far avoided asking my bank if it's at all true.
We own a fourplex and are very lucky to have 4 wonderful tenants .We have never missed a month's rent but we also maintain price right and take care our property and if somehing breaks it gets repaired asap. These ingrediants make ownership very pleasureable and profitable. We have been lucky . There are horror stories with troublesome tenants but I think the good outweighs the bad.
Excellent thoughts on what to consider when buying an income property. There are many that don't figure out all the true costs involved with home ownership. I like how you have laid out examples on what to expect with mortgage payments/rent/expenditures.
yes i agree, one problem would be arise if the tenant would not be able to pay on time, so you need to raise again then an extra money to cover up the mortgage
Deya,
I really liked this article. You analysis showing how much of the mortgage payment the individual would have to come up with was very good.
In a lot of the suburbs of Toronto, such as Brampton, Markham, mainly, there are a lot of basement apartments located in single family homes. A lot of people end up purchasing the home to live in, and then renting out the basement as a source of income. The city By-Laws of the suburb that I live in prevents basement apartments, however, there are a good number of people that are still renting out their basement units to tenants as a source of income.
Another factor to consider, if someone is looking to buy a rental property with multiple units, and living in one if them is, will they be able to handle living in such close proximity to their tenants. Some people can do this no problem, whereas others find it a little bit difficult to do.
A friend of mine bought a 4-plex in the Kitchener-Waterloo-Cambridge area. He rented out 3 of the units and lived in one. He hated every minute of it. :)
So he decided never to do it again. :)
Best Regards,
Neil.
There are other ways to increase your rent. If yout property has a garage you cant rent it out for stoarge or a small work shop. If you have a large driveway rent it for RV parking or boat storage. Another option is convert the garage in to a studio apartment and rent it to a student.