Owner-Occupied Multifamily — The Path to Financial Freedom?

LOS ANGELES – Emily Johnson recalls her first duplex fondly — well, sort of.

She rented to a friend’s sister, who ended up being “a nightmare”: The tenant smoked in the house, paid rent late and knocked on Johnson’s door at 11 p.m. with maintenance requests.

Nevertheless, Johnson caught the investing bug. That experience 20 years ago inspired her to buy four more owner-occupied, or live-in, duplexes, which generally require smaller down payments than investment properties occupied by tenants alone. Today, she works as a real estate agent with Sotheby’s in Los Angeles, helping others buy multifamily properties — and avoid common beginner blunders.

“I made all the mistakes the first time,” Johnson says with a laugh.

On TikTok, influencers have rebranded this concept as “house hacking.” Buying an owner-occupied multifamily property has a fresh appeal to younger buyers thirsty for passive income, or just a leg up in a brutal housing market.

The typical monthly principal and interest payment on a single-family home has more than doubled in the past three years, from $1,035 in 2020 to $2,192 in Q3 2023, according to the National Association of Realtors®. Suddenly, unclogging someone else’s toilet doesn’t seem so bad, so long as they’re helping pay your mortgage.

But that rental income is “not free money,” Johnson stresses. To succeed as a live-in landlord, you need a goal, a budget and good boundaries, as well as a solid rental agreement to protect everyone involved.

Know your long-term goal

For many, buying an owner-occupied multifamily is the beginning of a path to financial freedom. “It’s literally someone else paying your mortgage,” Johnson says.

First, establish your homebuying budget. Then, estimate how much the market rate rent will offset your mortgage payment — and establish your plan for the added income. Do you want to save for a down payment on a single-family home, then sell the duplex when you’re ready to move? Or maybe you’ll keep it to fund your child’s education — or your next multifamily property.

In Los Angeles, Johnson sees entertainment industry workers buying multifamily properties to have a source of steady cash between gigs.

“It’s a great model for artists, for people who want extra passive income,” she says.

Find a buyer’s agent who understands your goals and can help find a suitable property. For example, you might be willing to sacrifice on square footage if you plan to move out in a few years. For a long-term residence, you might want more space and privacy.

Shop for a mortgage

You’ll save money if you shop around: Compare lenders (at least three) for your mortgage preapproval.

You don’t need to put 20% down to buy a multifamily property. Last month, Fannie Mae lowered its down payment requirements to 5% for multifamily properties up to four units, which previously required 15% to 25% down.

You can put down as little as 3.5% on a property up to four units with an FHA loan. Matt Horan bought his first home, a duplex, in Pittsburgh in August 2019 using an FHA 203(k) renovation loan. That enabled him to roll remodeling costs into his monthly mortgage payment.

“I thought, OK, I would be able to buy a home now sooner than I anticipated for a less upfront cost,” he says, “while I have someone that pays for most of my mortgage, if not all.”

Budget for repairs and maintenance

One common misstep for new live-in landlords is underestimating costs, says Bob Pinnegar, president and CEO of the National Apartment Association. When pricing out renovations or repairs, multiply the need by the number of units. If one water heater needs to be replaced, they might all need it, Pinnegar says.

Routine maintenance is another expense, but you can save if you’re willing to do some work yourself. You’re also on the hook to pay insurance and taxes, which are likely to increase over time.

“You’re running a business now,” Pinnegar says. “You have to set up a budget.”

When thinking through costs, prioritize which upgrades could help you earn more rental income. That might mean redoing your tenants’ units before your own.

Johnson recalls her first duplex. “Our side was a disaster for the longest time because we’re like, ‘We can live with that,’” she says. “We needed to get that income coming in — and the income paid for our renovation.”

Horan knew he needed to invest in cosmetic fixes, like ripping out the shag carpeting, to make his duplex appeal to tenants. Horan also hired a contractor to convert each unit’s dining room into a second bedroom to increase the market rate rent.

Understand your legal obligations

If you find a lease template online, make sure it’s reviewed by a real estate attorney who is familiar with your area’s regulations, Pinnegar says. The lease must follow local, state and federal laws to prevent discrimination, including rules about tenant rights and rent control.

Fair housing laws apply when advertising your property and reviewing potential tenants, too. For example, you can say it’s a nonsmoking building, but you can’t say “Smokers need not apply.”

To ensure you’re following fair housing laws, your local Apartment Association can recommend companies to assist with background checks and tenant screening. Use the same criteria when reviewing all potential tenants. Ideally, their gross income should be at least two and a half to three times what you’re charging for rent, Pinnegar says.

Finally, familiarize yourself with health and safety codes that set standards for rental properties. A home inspection can catch hazards like lead paint or mold.

Set good boundaries

In your lease, let tenants know how you’ll address common concerns like parking, noise complaints and maintenance requests. “That way you’re able to really put together an agreement that’s going to govern the relationship in good times and bad,” Pinnegar says.

Clear expectations are key for everyone’s safety and comfort — especially as a live-in landlord, when you might be sharing walls or common areas. It might seem like a good idea to rent to friends or family members, but blurring the line between personal and professional relationships can create conflict.

“Have good boundaries — I just can’t stress that enough,” Johnson says.

It’s not always easy to manage a duplex or other multifamily property, but the experience can help you grow personally and professionally. Horan says it’s been rewarding to make connections, learn maintenance skills and help his tenants when they need him.

“You’re going to continue to learn things about yourself, about the business,” he says. “It’s important just to have that open mind and learn.”