Buying a home with a rental unit

By October 13, 2022 No Comments
buying a home with a rental unit

Buying a home can be full of difficult decisions and as housing prices climb – maybe even more difficult financially. For people looking for a way to help pay their mortgage each month, choosing a home with an attached rental unit may provide a monthly bump that makes a house payment easier to accomplish.

What is an Attached Rental Unit?

An attached rental unit, formally called an Accessory Dwelling Unit (ADU), is typically a smaller living space adjacent to a main home. It might be a tiny house in the backyard or something more like self-contained mother-in-law quarters attached to the house. It can even be a small apartment over the garage. There aren’t a lot of rules about what an ADU has to be, except that it should be fully autonomous.

The reason for autonomy is to have solid rental income potential from a secondary dwelling, on a regular lot. Imagine if you were renting an apartment somewhere, you’d certainly want to have your own kitchen and bathroom, wouldn’t you? It’s difficult to rent units without these features so typically they’re part of any successful ADU.

Benefits to having an ADU

Having a rental can be a lot of work but there are also a lot of benefits. The rent from an ADU can help pay the mortgage every month, it can also act as flexible space.

For example, when you first buy your home, maybe you really need help with the mortgage payment, so you use the ADU as a long-term rental unit with a tenant who has signed a year-long lease. This tenant pays the utilities for that unit and helps out with the mortgage by paying rent. It’s a great situation while you’re trying to pay down your mortgage and ramp up your income.

As time goes by, you might get tired of dealing with a long-term tenant but you can still use that unit for short-term tenancy – if permitted by your neighborhood and city. Airbnb, for example, gives you the option to rent by the day or week, so you never have to stick with a tenant for too long. You can turn off being a landlord for a few weeks and go on vacation yourself without having to worry.

If AirBnB isn’t your thing, your ADU can still be used by your college-aged child or aging family member. Remember, these are essentially self-contained apartments, so they should provide a great deal of privacy and autonomy to anyone living inside. ADUs have long been favored by people with aging parents, hence the former popular nickname “mother-in-law quarters.”

Financing a home with a rental unit

If you’re looking for a house with a rental unit, you may need to figure out financing. Most mortgages will allow you to purchase a property that has up to four units on it. Four may be a lot to manage initially but a single ADU is pretty easy upkeep and a good place to start. .

All you need to do is choose a property that you like and ensure that it will pass any requirements from your lender (your Realtor can help with this). Certain programs may have specific inspections, such as FHA, VA, or USDA, so you definitely want to let your lender know that you’re looking for a property with an ADU before you commit to your loan.

Ready to finance your home and ADU?

You’re going to need a good lender who isn’t shy about writing loans on properties that might be less than typical. Rooted&Co can connect you with a loan originator. Before you know it you’ll have a home of your own and a small rental unit to help pay the bills.

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