There was a great article in the Chicago Tribune about five or six years ago. It spoke of the incredible values of the Roscoe Village 2-flat and how it had been a tried and true starter home for generations in Chicago. The rent would subsidize the mortgage and appreciation would compound on a larger home value.
Fast-forward to three or four years ago, prices had skyrocketed as investors were buying 2-units with as little as 5% (eventually 0%!!!) down. The values weren't as extreme as before. In fact, many were selling for more than the value of the cash-flow of the building. Many first-time homebuyers opted for the condo. It made sense.
Fast-forward to about one year ago: Rates were high, uncertainty was high, and the housing market had years of unsold inventory sitting idle. Values, values everywhere and nary a loan in sight.
Fast-forward to today: The Existing Home Supply has dropped significantly, the $8,000 tax credit continues to push a surge in home purchases, and mortgage rates continue to hover near 5%.
Home supplies are off 23% since November of 2008. We are consistently hearing that the remaining condominium inventory looks like a shopping rack after a massive sale. Thin.
If the 23% most desirable homes are now gone, where are all the values hiding?
Fast-forward to three or four years ago, prices had skyrocketed as investors were buying 2-units with as little as 5% (eventually 0%!!!) down. The values weren't as extreme as before. In fact, many were selling for more than the value of the cash-flow of the building. Many first-time homebuyers opted for the condo. It made sense.
Fast-forward to about one year ago: Rates were high, uncertainty was high, and the housing market had years of unsold inventory sitting idle. Values, values everywhere and nary a loan in sight.
Fast-forward to today: The Existing Home Supply has dropped significantly, the $8,000 tax credit continues to push a surge in home purchases, and mortgage rates continue to hover near 5%.
Home supplies are off 23% since November of 2008. We are consistently hearing that the remaining condominium inventory looks like a shopping rack after a massive sale. Thin.
If the 23% most desirable homes are now gone, where are all the values hiding?
Well, if what caused the quick drop in real estate prices was the lack of mortgage financing options effectively freezing the housing market, has the 2-flat become the savvy option again?
The supply has certainly not been picked through as hard as the condo market. While Fannie Mae has tightened up many guidelines, they've hit two groups the hardest:
- Credit scores between 620 and 739 have varying levels of extra fees
- 2-Units: now require a 20% down payment
Enter the FHA 2-Unit
The FHA 2-Unit still only requires a 3.5% down payment. The rent from the subject property can be included in loan qualification calculations. The mortgage insurance varies from .5%-.55% based on down payment. The mortgage rates are not as credit-driven as Fannie Mae's.
At today's mortgage rates, rent of roughly $550/month supports roughly $100,000 of loan and mortgage insurance payment. A rental unit earning $1100/month supports nearly an additional $200,000 of loan and mortgage insurance payment. For many of our recent home loan approvals, the combined debt-to-income ratio was actually LOWER on the 2-unit than the condo.
While FHA Condominium Approvals are changing, the condo approval issues remain the same: Are there adequate reserves? Are there too many FHA loans in the building? Are there too many investors in the building? Is there too much commercial square footage? These are not questions for a 2-flat buyer.
Is a 2-flat the right option for you?
I saw something on CNN this morning: 63% of Americans said their personal finance habits would change "permanently" based on the lessons of this past year. Let's protect our homes the way a home ought to be protected.
To make the 2-flat a conservative option, I'd assume 25% vacancy on the rental unit. That is to say, can I comfortably stomach the payment on my income plus 75% of the rental income?
To make the repairs and maintenance more easily budgeted, I'd set aside 1% of the value of the home annually for repairs. At some point the expenses will arise, this allows you to sleep easier.
To help me expect the unexpected, I'd reach six months principal, interest, taxes, and insurance in cash or equivalent as fast as possible.
Is the 2-flat a good idea? Yes, it's a great idea. The difference between a great idea and a great decision depends on the planning and team of professionals. If you need a referral of a qualified Realtor who understands the multi-unit market or a financial planner to discuss the impact on your finances, contact us.
