Buying an Income Property to Live in

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.

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June 8, 2009

by Devanira Bautista

Julie D. Martin

Julie D. Martin

Sales Representative
CENTURY 21 Heritage House Ltd., Brokerage*
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