Buying a two- or three-family to live in and rent out

How the numbers work

A two- or three-family lets you live in one unit while the rent from the others pays part of the cost. Start with the full monthly cost of owning the building: mortgage payment, property tax, insurance, any utilities you pay as the owner, a repair reserve and an allowance for a vacant month. Then set realistic rents against it, and compare the net cost of your own unit with what it would cost to rent similar space.

Multi-family prices follow rents more closely than single-family prices do, and fewer of them sell, so comparable sales are scarce. Look at sales over a wider area than you would for a single-family home, and compare the rents and condition of each building as well as its size. An offer price should be backed by numbers you can explain: recent sales, current and market rents, and how long the property has been listed.

Financing as an owner-occupant

Several loan programs treat a two- to four-unit home you live in as a primary residence. FHA insures loans on one- to four-unit properties with a down payment as low as 3.5% of the purchase price for borrowers who meet its credit and property requirements. At least one borrower must move in as a principal residence within 60 days of signing the mortgage and intend to stay for at least a year. MassHousing’s down payment assistance is open to income-eligible first-time buyers purchasing a two-, three- or four-family home as their primary residence, and Boston’s first-time homebuyer assistance covers one- to three-family homes in the city.

Ask each lender how it will count the rent. Rules differ by program, but the pattern is similar. Under Fannie Mae’s Selling Guide, the lender relies on the appraiser’s rent schedule and, when a lease will transfer to you, also on the fully signed lease, and multiplies gross monthly rent by 75%. FHA adds a test for three- and four-unit homes: the appraiser’s fair market rent for all units, including the one you will live in, less the greater of the appraiser’s vacancy and maintenance estimate or 25% of that rent, must cover the monthly principal, interest, taxes and insurance. A borrower with less than twelve months of experience managing rental property may use that income only to offset the payment on the property being bought. Down payment and reserve requirements for two- to four-unit homes can also differ from those for a single-family home, so get the figures for the specific building before you make an offer.

Estimating the rents

Rent is set by supply and demand at the time a unit comes up. Greater Boston’s rental market peaks for September 1 move-ins, has a smaller wave around January 1 and is quieter in other months. Two units that look alike can rent for quite different amounts if one starts in September and the other in March, so compare units with similar start dates.

Look at rentals that have already leased, not only those on the market, and at how long each took. A unit still listed after weeks calls for a second look at its price, condition, start date and showing schedule; one that leased within days was probably priced at or below the market. Small advantages rarely move rent much. Off-season, nearby listings largely set the price, and a unit priced above them waits. Furniture is not a premium for most renters in the off-season. Parking adds value where transit is limited.

Then check the leases you would inherit. Current rents below the market are common in long tenancies, and the gap closes only when a lease ends or a tenancy is lawfully changed. The guide to renting out a home for the first time covers pricing and screening once a unit is yours to lease.

Tenants, deposits and last month’s rent

A sale does not end the tenancies in the building. Leases continue on their terms, and state law provides that a sale does not by itself end a tenancy at will in a dwelling. If you need a unit empty, that has to be arranged before closing with the seller and the tenant, or handled afterward through the notice and legal process the law requires. The purchase and sale agreement should state which units are delivered vacant and which are occupied.

Security deposits and last month’s rent move with the building. The seller must transfer each deposit, with accrued interest, and credit any last month’s rent to the buyer; the buyer must notify the tenants in writing within 45 days. If the seller fails to transfer a deposit, the buyer becomes liable to the tenant anyway. Ask the seller early for copies of every lease, a rent roll, the deposit and last-month amounts, the bank details and the interest records, and have your attorney reflect them in the closing figures.

Inspection and compliance

Inspect each unit, not a sample. Each may have its own heating system, water heater and electrical panel, and the shared parts, such as the roof, foundation, porches, stairs and exterior, carry costs for the whole building. Ask how the utilities are metered and who pays for what; separate meters change both your costs and what you can charge.

On a sale, the seller must have the home’s smoke detectors certified by the local fire department. In a building built before 1978, if a child under six lives in a unit, the owner must delead that unit or bring it under interim control. In Boston, every rental property must be registered with the city each year by July 1, including a unit that is vacant. Renting the other units also brings the duties covered in the landlord compliance checklist: deposits, the State Sanitary Code and fair housing.