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"Macaroni millionaire" is an old term for people who buy a house that makes them look rich, but in reality the occupants can afford to eat only pasta because of their giant mortgage. "House poor" is another commonly used term.
One way to avoid having either term applied to you is to purchase a multi-family home and rent out the other unit or units. This way you can get into the real estate market while simultaneously finding some financial relief from a mortgage that leaves little room for any other expense. This tactic has its own drawbacks, however.
When looking to buy a property that's even in part an investment property, many people expect to rely on a rental income stream to help them pay the mortgage. But it's important to know how your bank or financial institution factors any potential rental income into your credit worthiness and ability to undertake a mortgage. One bank will calculate how the rental income is applied to the total of your income from other sources, while another bank will wash it against your PITI (principle, interest, taxes, and insurance). Believe it or not, it makes a difference in your eligibility for a mortgage.
In an investment property situation, it's also important for you to examine your cash flow, as this affects how much financing you'll be able to obtain. First, look at the property's purchase price and determine the monthly payment, including property taxes (which usually increase every year) and homeowner's insurance. Second, look at the rental income potential per unit, keeping in mind that in most cases, banks will only give you credit for 75% of the expected rental income. You'll need to leave room in the cash flow projection for vacancies, too. Finally, ensure your numbers make sense and won't leave you with insufficient funds for utilities, repairs, and maintenance.
Maintenance costs for landlords vary greatly from those you would expect to incur as a homeowner. Aside from being required to update electrical, bathrooms, or kitchens in order to remain competitive in the marketplace, state and local housing codes may necessitate other repairs or accommodations. For example, as of March 31, 2006, a new law requiring the installation of carbon monoxide detectors in residential dwellings went into effect; like installing and maintaining smoke detectors, this is now a landlord's responsibility.
If you have questions about your rights and responsibilities as a landlord, consult a landlord-tenant attorney in advance of undertaking such an investment. And, as always, if you have questions about real estate financing, consult your mortgage broker or financial professional.
Got questions about real estate financing? Contact Debbie@westchester-mortgage.com or 617-965-1236. She'll consider them for inclusion in a future column. Debbie Siegel is president of Westchester Mortgage in Newton, Mass. She is licensed in several Northeastern states.
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