Adapt and Overcome. Why a two unit building might be best for you.

Unless you’ve been living under a rock this past year, you know how crazy the real estate market has been in the bay area.  In the past year the home prices have risen 22% in Alameda, 30% in Berkeley and Oakland. The median sales price for homes sold in Alameda is about $630,000, Berkeley $718,000,  and Oakland  just under $400,000.

With the quick rise in home prices many who started their home search last year are simply priced out of the market.  For example, if you started January 2012 you would have been able to purchase a home below $500,000. The increase in home pricing since then will require you to pay additional $20,000+ down payment on a conventional loan. Couple that with interest rates rising a full point and you have a large segment of first time home buyers who cannot afford a home because not only will the loan amount be greater but it's going to cost them roughly $350 more a month in principal and interest based on a $630,000 purchase/$504,000 loan.  Even if you are well disciplined in budgeting and saved enough annually to keep up with the rising purchase prices your income may not; making it hard to qualify for the loan based on month debt to income ratios.

So what are people to do?

Like any hurdle in life people adapt and buying a home is no different. Some buyers start to look out of the area, smaller homes or condominiums. All are reasonable compromises but there is another option that most people never think about and that is a two unit home.  Not only is this option more affordable in terms of purchase price, it is also significantly kinder to your monthly budget or actual housing cost.  Using Alameda as an example, the median home price for 2 unit homes is $630,000 and the median sales price for SFH available is $675,000. The benefit to exploring this alternative for those that have been priced out of the market is that rental income (potential or actual) can be included in your loan application as additional income!  This immediately changes your debt to income ratios helping you to qualify for the higher purchase price. But the biggest advantage is that the rental rate of a 2 bedroom unit will most likely cover more than half of your mortgage payment.  Based on the loan example above the mortgage payment for a $630,000 with an 80/20 loan to value is an estimated $3,300 PITI (Principal, interest, taxes and insurance).  If rental income was $2,000 the new home owner’s payment would $1,300! And for a first time home buyer or a those who are starting a family, the amount of breathing room this gives you is tremendous.

Is this right for you?

While the above scenario might sound great, it’s not for everyone and there are risks involved. The biggest of course is not renting the unit but those who are renting now understand looking for a decent rental is even harder than buying a home.  Another deterrent is that Landlords have the responsibility make repairs quickly and safely as they arise but this shouldn’t be looked upon as a negative because it’s your investment that you are servicing not the tenant.

Bottom line is that in this market you should be open to making necessary changes to your end goals/wants and needs if buying a home is really important to you.  And while people may get caught up in the romance of owning a home, it is a business transaction. For you, the seller, the lender, the title company, the appraiser, etc. And if you can stay on point with that message then you are most likely to avoid making a bad decision for you and your family. Like I always tell my clients "We all get to walk away when this is done, you on the other hand are stuck with your decision. So make it a good one".

**Searching for multi-unit homes may be a little tricky and do not always show up in standard home searches due to entry methods and classification rules of the MLS. If you would like a list emailed to you or have additional questions feel free to call or contact your licensed Realtor.

This article was provided by John-Michael Kyono, Broker, 510-629-0890 or jmkyono@alamedavictorians.com. 
Voted Best Real Estate Agent - Alameda Magazine 2013