I have 2 friends who both recently purchased their first homes in the Boston area. While I’m happy for them both, my friends took two completely different approaches to home ownership, which resulted in two wildly different financial scenarios. Below are the details
Larry (friend #1) makes about $40,000 annually, has very little consumer debt and a fair credit score (650). Larry was pre-approved by his mortgage broker for a $300,000 homes purchase based on his financials. As of 2016, $300,000 in Boston will buy you an entry level single family in the city which is what Larry decided to purchase. His mortgage, taxes, insurance, and water bills cost Larry about $2,077.30 after a 5% down payment and paying his own closing cost. His monthly cost of detailed below.
Larry’s Payment Information
Principal & Interest: $1,360.63
Water/ Sewer: $50.00
Total Monthly Payment: $2,077.30
Pros & Cons:
- Larry has the joys of single family living and doesn’t have the responsibilities that come with tenants
- If anything happens to Larry financially, he is on his own when it come to covering his monthly obligations
- Larry was able to purchase this home with 5% or just 15,000 out of pocket.
John (friend #2) makes nearly the same annual salary of $40,000. John also has very little consumer debt and a 650 credit score. Instead of accepting the same $300k pre-approval Larry did, John decide to talk to his mortgage broker about purchasing a multifamily property, more specifically a Boston triple decker. John planned to live on one floor and rent out the other 2 units to help cover his monthly cost.
John’s mortgage broker did some research and found that apartments in John’s area were renting for $1650 per month on average. If John occupied one unit and collected rents from the other two, he would be putting an additional (after his own salary) $3700 per month in his pocket. In this scenario, John’s mortgage broker re-evaluated John’s financials and determined that if John was to purchase a triplex, he could afford to spend up to $550,000. Simply put, the additional rental income allowed John to purchase a larger home. After John collected rental income from his tenants each month, John was left with a balance of $4.17 that he need to cover. John was essentially living for free. ($1650 per month x 2 rental units = $3700 – Monthly Cost of $3,704.17 = $4.17 balance)
John’s Payment Information
Principal & Interest: $2,554.17
Water & Sewer: $150.00
Total Monthly Payment: $3,704.17
Pros & Cons:
- John was able to purchase this property with 5% (27,5000) out of pocket.
- John has a very small obligation every month (4.17$) to cover but what if one of the tenants moves out? John will need to save money to cover the cost of vacancy. He will also need to cover the cost of repairs to the building/ tenant units.
- John doesn’t have the privacy single family home provides.
- John will eventually raise his tenants rents. If rents go up, John’s income from the property goes up as well. Now he’s putting money in his pocket every month after his expenses…”cash flowing”
- If John ever moves out of his apartment he could also rent it for market value. In the near future he could be putting $2000 into his pocket every month.
- John does need to create a reserve account for the raining days that come as a landlord.
Would you like to speak to one of our mortgage brokers and find out what you qualify for? Are you interested in purchasing a multifamily home and need more information? Give us a shout at 617-297-8641 or email us at Contact@MandrellCo.com