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Duplexes as a Starter Home

In talking to first time home buyers, I hear a lot of people saying that they don’t feel they can afford to buy a home in Portland while home prices increase and the housing inventory seems to be shrinking.  While it is understandable for many people to feel this way, I think the Portland house market is still attainable for first time homebuyers with a bit of creativity.  One avenue to break into this markets is having a bit of a mind shift away from the “perfect house” being your first home.

Several years ago people talked about buying their “starter home”.  It was going to be the small fixer upper that they would put some sweat, blood, and tears into while they saved up for their “real house”.  I believe that multi-family homes are the next generation’s version of a “starter home”.  Let’s take a look at the idea of a multi-family property, namely a duplex, as our “starter home”.

Currently the median single-family home in city of Portland is $397,000 while the median multi-family home is $523,000.  I know what you’re thinking…..”Conor, I am afraid I can’t afford $397,000 and you want me to look at something that costs $523,000???”.

Stick with me.  Below is a breakdown of roughly how your down payment and financing would look for each scenario:

Single-Family Home Multi-Family Home
Purchase Price $397,000 $523,000
3.5 % Down Payment 13,895 18,305
Monthly Mortgage @ 4.25 Interest Rate $1,884 $2,483
PMI $150 $200
Total Monthly Cost $2,034 $2,683

Keep in mind that the numbers above are only estimates, however it gives you a ballpark idea of each scenario.

As you can see the multi-family home will require about $4,400 more in down payment and will result in about a $650 higher monthly payment.  If you’re still reading this it means you don’t think I’ve completely lost my mind…..

Currently the median rent in the city of Portland is $1,558 per month. While I’m sure you are well above average in every other facet of life, lets assume you are the average renter and are also paying around $1,558 in rent.  At the same time, when you buy your multi-family home, we can naturally assume that you will be collecting $1,558 per month in rent from the unit that you do not occupy.  This changes are scenario significantly:

Single-Family Home Multi-Family Home
Purchase Price $397,000 $523,000
3.5 % Down Payment 13,895 18,305
Monthly Mortgage @ 4.25 Interest Rate $1,884 $2,483
PMI $150 $200
Total Monthly Cost $2,034 $2,683
–       Rental Income $0 $1,558
Adjusted Monthly Cost $2,034 $1,125

So what does all this really mean?

First of all it means that by investing in the multi-family unit you are reducing your current cost of living by about $433.00 per month versus your current rental situation.  If we take that monthly cost savings over the course of time you are adding over $5,000 per year to your savings account.  (Keep in mind we haven’t added any of the tax benefits of being a home owner into this equation.)   When combining this additional savings with the ability to use the equity that can be built into this home to buy your “dream” home (or at least your next one), this can become a powerful way to break into the market.  We’ll discuss how the equity of your duplex works towards your next home in a future post.

I’m not saying that this formula is for everyone, however it is worth considering, and if you’re interested in learning more call or email me a let’s form a plan that will work for you!

Thanks for your time,

 

Conor

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