Owners of two-family homes are often those who live in one unit and rent out the other. The rental unit acts as a source of income that pays a significant portion of the property’s mortgage. Owning a two-family home can be a great way to live in a home and pay off the mortgage with money leftover for other expenses or savings. And when you’re ready to move into a different home, you might be in a position to keep the two-family property and rent out both units for continued income. As attractive as the prospect may be, there are still issues that some might consider a downside. Make sure you know the full picture before deciding you’re ready for this endeavor.
1. Limited location. Two-family homes are usually in more urban areas while single family homes are more suburban. Many areas even have restrictions on whether multi-unit homes are allowed. This means your options for location are limited to wherever such homes are built. Also, consider the neighborhood where you find a two-family that you like. Will it attract quality renters in terms of finances and property care? What’s the top rent you’re likely to get in that location?
2. Higher price point. Depending on the location, two-family homes usually are more expensive to purchase than single family homes of similar size and quality and therefore cost more. This means you’ll likely need a larger down payment to purchase.
3. Financing. Getting a mortgage for a two-family home can be trickier than for a single-family. Your down payment will likely be around 25%, much more than that of single-family homes. While you can use potential rental income to qualify for a mortgage, you still need to have good credit and a low debt-to-income ratio. Banks are well aware that tenants leave unexpectedly (or skip paying), so they need to know that you can still cover the full mortgage.
4. Disturbances and less privacy. Living in a two-family is similar to living in an apartment building. You may still hear the neighbor’s footsteps upstairs or loud music next door. Also, since you’re the neighbor’s landlord, he or she might knock on your door more often for questions or repair requests.
5. Collecting rent and eviction. You’ll need to collect rent regularly and know how to handle situations when the rent is late or not paid at all. If a tenant stops paying rent, you’ll need to implement the eviction process, which could require legal help and take over a month’s time. All the while you’ll have to cover the full mortgage yourself.
6. Costs associated with vacancy. When a tenant leaves and you have no one to move in right away, you’re covering the full mortgage yourself until you find a new tenant. You’ll need to prepare the unit for someone new, which may involve repairs and paint. And you may need to advertise to find a qualified tenant.
7. Complex taxes. If you’ve enjoyed a simple tax return in the past, get ready for more complexity. The IRS publication, Residential Rental Property (Publication 527) contains rules that you need to know so that you don’t break any of them and get in trouble. It contains information on rental income and expenses, depreciation, reporting requirements and rules for personal use of the property. You’ll also need to add Schedule E to your tax reporting, called “Supplemental Income and Loss.”
8. Selling. There are far more buyers looking for single-family homes than two-families, so selling could take more time. You could consider a rent-to-own contract for a tenant. If you do sell, be aware who is making the offer. Investors tend to want “deals” and make offers on the low side. But someone expecting to live in the home while renting out a unit will be more likely to pay in the market price range.
Living in a two-family can be a great investment for the long-term with its additional income. Before you take the leap, be certain that you’re willing to take on the responsibilities of landlord and the potential issues that often arise.