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I currently rent the top floor of a two-family house. Our landlord recently offered to sell the house to us, so I started looking at the cost of mortgages and property taxes in the area.

It's my understanding that both property taxes and first-home mortgage interest payments are tax-deductible, so given that and assuming that I keep a tenant on the first floor, if I were to purchase the home, remain in my current unit and rent out the bottom floor, my net housing costs would be utterly negligible - maybe a quarter of what I pay now, maybe even less.

What are some disadvantages of this setup? It seems like more people would be doing this if it were so straightforward, so I'm wondering what I'm missing. I don't mind sharing a building and we actually have more than enough space on this floor for the near future - is it just that most people have a problem with sharing a house?

Also, does anyone know of any books on doing this sort of thing, i.e. renting out half of your home to a tenant and living in the ret?

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    Why does your landlord want to sell? That could be a sign that it might not be a great deal. – Nicole Nov 17 '11 at 21:47
  • Yeah, I thought about that too. I asked why they were selling and apparently they have four or five properties in the area but are trying to sell them to retire to Florida. – bill Nov 17 '11 at 22:04
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    I added the united-states tag because it sounds like that is where you are, and rules about tax deductions are region-specific. Part of your question is more general so if you want to remove the tag and/or split it into two questions, feel free. – Vicky Nov 18 '11 at 9:47

10 Answers 10

11

The biggest question is do you want to be a landlord?

There are a lot of ups and down to managing property from bad tenants to having to fix a water heater or replace a fridge. If you aren't interested in being a landlord, it is definitely a bad idea.

If you do want to be a landlord, then the question is how close do you want to be to your tenants? What if they are up late making noise, etc.? What if they watch TV all night and you hear it through the walls? What is your plan?

You ask if people have trouble "sharing" a house. If you are the landlord and the other party the tenant, then you aren't "Sharing", you are leasing. It's a different relationship with different strains.

4

You are a "strategic" investor, which is to say that you are in the best position to evaluate the deal because you already live there. Others don't have this advantage going in, which is why they might not be inclined to do what you're doing.

Your biggest advantage is that you know at least one tenant. In essence, you are your own "tenant" for the top floor You also presumably have a pretty good idea of the neighborhood. These are arguments for owning your own home, although it does get a bit trickier with a second tenant, whom you may not know. Do check credit and references, etc.

You might ask the landlord why he wants to sell. Presumably it's because he wants to retire or move, and not a problem with the property. But it does no harm to ask.

3

First, you can look up the property tax of the building you are in for an exact number. Go to you town's tax office or look at Zillow.

You need to claim the rent as income, but will take all expenses as well as depreciation on half the building. The numbers may well work in your favor, especially as a resident landlord. I still own a rental in the next state, but it's 2 hour away, so I'm paying pros to do the simplest things. On site, you can handle all maintenance and save that way.

If the cash flow looks like it's better than what you have right now, it might be time to buy. Without seeing the numbers I can't point out what you might be missing.

  • Yep, I used Zillow to find the annual property taxes. They haven't set a listing price yet, so I used Zillow's estimate. – bill Nov 18 '11 at 1:08
  • ZEstimate is just indicative and should not be taken as a base price to pay. – Asdfg Nov 21 '11 at 22:28
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There's nothing wrong with it. Living in a two-family house and renting the downstairs was a fairly standard path to the middle class and home ownership in the 20th century. Basically, if market conditions are good, you'll have someone else paying your mortgage.

The disadvantage of the situation is that you're a landlord. So you have to deal with your tenant, who is also a neighbor. Most tenants are fine, but the occasional difficult person may come out of the woodwork.

That model of achieving home ownership became less popular in the late 60's-early 70's when the law allowed two incomes to be used for mortgage underwriting. Also, as suburbanization became a national trend, absentee landlords became more common

Sounds like you are in the right place at the right time, and have stumbled into a good deal.

3

Others have already made good points, so I'll just add a few more:

You say that if you bought it, your mortgage, insurance, and taxes minus the rental income from the bottom floor would leave you with costs of 1/4 of your current rent. That means you're getting a fantastic deal on the purchase price.

I suspect you may be underestimating some of those costs. So, get exact figures on the mortgage, insurance and taxes and do the math. If it is that good, go for it, just make sure to get that home inspection (in case there's major problems and they're trying to get out while the gettin's good)

Also, some advice:
Be prepared to cover that entire monthly cost for a few months. Units can stand empty for a while. Also, you may want to rent out slowly - a good tenent found after a couple months is much better than a bad tenent found quickly.
Also, have some money set aside for maintenence. As a renter, you've never really had to think about that before, but as a homeowner you do. As a landlord, it's even more important - you can not fix something in your own home for a while if you needed to wait, but in a tenent unit, you have to fix it immediately.

Finally, taxes:
You do get to deduct interest, and so on, but it'll work a little differently than you think. You'll have to split it in half (if the units are the same size) and deduct half the interest as a normal homeowner deduction, the other half as a business expense. Same for PMI, insurance, and property taxes. If you do maintenance that effects both units, like fixing the roof, half will be deductible, the other half not. However, maintenance that only affects the tenant unit is fully deductible.

You can claim depreciation, but only for half. So, your starting amount you can depreciate would be (purchase price - land value)/2. Same thing here - half is your home, the other half is a business.

Note that some things you'd think of as maintenance costs actually can't be deducted, only depreciated over time. Take that leaky roof, for example. If you replaced it instead of repairing it, you could not deduct your replacement costs. It counts as an improvement, and gets added to your cost-basis, where you depreciate it along with (half!) the house.

If your tenant's refrigerator went out, and you replaced it, you couldn't deduct that either. However you can depreciate all of it on another schedule (seperate from home depreciation). If you repaired it instead, you can deduct all of it immediately.

Taxes suck.

2

Think carefully about the added expenses. It may still make sense, but it probably won't be as cheap as you are thinking. In addition to the mortgage and property taxes, there is also insurance and building maintenance and repairs. Appliances, carpets, and roofs need to be replaced periodically. Depending on the area of the country there is lawn maintenance and now removal. You need to make sure you can cover the expenses if you are without a tenant for 6 months or longer. When tenants change, there is usually some cleaning and painting that needs to be done.

You can deduct the mortgage interest and property taxes on your part of the building. You need to claim any rent as income, but can deduct the other part of the mortgage interest and taxes as an expense. You can also deduct building maintenance and repairs on the rental portion of the building. Some improvements need to be depreciated over time (5-27 years). You also need to depreciate the cost of the rental portion of the building. This basically means that you get a deduction each year, but lower the cost basis of the building so you owe more capital gains taxes when you sell.

If you do this, I would get a professional to do your taxes at least the first year. Its not hard once you see it done, but there are a lot of details and complications that you want to get right.

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Also, does anyone know of any books on doing this sort of thing, i.e. renting out half of your home to a tenant and living in the ret?

Head down to your local library. Mine has a state guide for renters and another one for landlords. There will likely be a lot of Nolo Press books around there too.

You can also research the property tax on a lot; many counties run an arcGIS server that will tell you who owns a given property, what the assessed value is and the total tax bill, etc.

1

A professional home inspection will clue you in on any problems you might be buying, so it's important in any real estate transaction.

If the seller finances the loan, you need a lawyer.

It might be a nice opportunity - being in the right place at the right time. You just have to investigate all angles.

0

Disadvantage is that tenant could sue you for something, and in an unfavorable judgement they would have access to your house as property to possess. You could lose the house. Even if you make an LLC to hold the house, they'll either sue you or the LLC and either way you could lose the house.

This might be why the landlord is moving to Florida where their house cannot be possessed in a judgement because of the state's strong homestead exemption ;)

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    Anyone can sue you for anything. Follow the advice of your attorney and insurance guy and it's not a problem if you're a responsible landlord. – duffbeer703 Nov 19 '11 at 16:30
  • Anyone can sue you for anything, the difference is what happens in an unfavorable judgement. – CQM Nov 19 '11 at 23:14
  • Ask your insurance agent about a PLUP (Personal Liability Umbrella Policy). They are cheap, and act as secondary insurance above your existing auto, homeowners, etc. insurance. I think I pay under $200/year for a one million dollar policy, specifically because of my rental property. One benefit in addition to the purely monetary, is that the insurance company's lawyers will handle the case, so you don't have to deal with that hassle. – KeithB Nov 21 '11 at 17:11
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This is one of those too good to be true things that is actually true. Why? Because only you can do this. Only you can deduct for primary home mortgage interest, only you can get a low cost mortgage (others would have to get investor mortgages at a higher interest rate). So its only a great deal for you.

More people would do it if they could, but they can't, thats why you can and should do this. I have a similar setup and it is terrific.

protected by Chris W. Rea Apr 1 '16 at 12:52

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