Sunday, May 9, 2010

Rental Income Can Make Home Ownership Affordable

When my wife and I started looking to buy our first home together in early 2005, we had a vision of living in a single family home in a trendy area of Silicon Valley that was close to all of the city's amenities and within biking distance to both of our jobs. Unfortunately, reality hit us hard in the form of sticker shock as we started seeing the prices of some of the homes in the area that we had set our hearts on. After using several mortgage calculators to understand how much these homes were going to cost us per month, we both knew that the mortgage payments would stretch our budget and leave very little money left for anything else. We considered buying lower priced condominiums in the area, but we knew that condominiums did not appreciate as well as single family homes. As we were about to give up our home search in despair, we passed by a duplex for sale and stumbled upon a well kept secret that neither our Realtor nor our Lender had told us about – rental income.

When many first time home buyers think about rental income, they imagine large apartment complexes that they neither have the money to buy nor the experience to manage. On the other side of the spectrum is a duplex – a structure typically the size of a single family home, that is split into two separate units which often share a wall. Depending on area, the purchase price of a duplex is typically within the same range as a single family home. However, for a first time home buyer a duplex affords some tremendous advantages over a single family home.

Although a Duplex can cost the same amount as a single family home, its major advantage is that a buyer can live in one of the units while renting out the second unit for rental income. This rental income can be used to offset the monthly expenses of the home thereby making home ownership significantly more affordable. In many cases, it is often easier to get a home loan to buy a duplex then it is to buy a single family home because banks count the potential rental income from the second unit as part of the borrower's income during the loan qualification process.

In the case of my wife and I, the prospect of buying a home in our preferred area became a lot more realistic when we shifted our search away from single family homes in favor of duplexes. First and foremost, owning a duplex would make our monthly finances much more bearable. The rental income from a duplex would offset a large part of our monthly housing expenses providing us with enough cash at the end of each month for putting into savings and other investments. Owning a duplex made sense as an investment. The rental income from a duplex would allow us to stay away from condominiums and buy a piece of land that would appreciate much more significantly. Owning a duplex would also reduce our cost of ownership. We realized that many of the single family homes in the area that we were interested in were too big for our immediate needs and would require a tremendous expense in monthly heating and cooling bills. By allowing us to rent out half of our property, a duplex would allow us to reduce the living space of our home and nearly halve our monthly utility bills.

Within a few weeks of deciding to buy a duplex, my wife and I bought a gorgeous property in a beautiful neighborhood that we would have otherwise not been able to afford had we continued looking at single family homes. Even in the housing recession that we are facing in 2010, our duplex's value has increased because of the increase in demand for rental units.


 


 


 

20 comments:

  1. Hi, I have considered buying a rental property but have been told by my friends that my taxes will become difficult. What is the impact of rental income on my taxes?

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  2. Hi JJ,
    Owning rental property will impact your taxes because rental property is considered similar to owning your own business. In terms of filing your taxes, you will be required to file an additional form that outlines how much money you made from rental income and what your expenses were related to this business.

    One thing you should note is that your rental income will make an impact on your tax payments because your rental income will offset your mortgage interest and property tax deductions. So, if you had rental income of $6,000 and had and paid $10,000 in mortgage interest and property taxes, you will only be able to deduct $4,000 from your taxes as opposed to $10,000 if you had not had rental income.

    On the flip side, because owning rental property is very similar to having your own business, you can deduct expeses associated with your maintenance of the property. In some instances, this can increase your tax deductions.

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  3. If that's the case, then it should always be considered so you can have an affordable home ownership.

    condo for rent in makati

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