Collins: Reimagining home ownership

Over the last few years there have been many discussions about duplexes.

This includes legislation around zoning changes driven by the state to encourage more duplex production, and more recently, a proposed local ordinance that would give corporate nonprofits a special priority in the purchasing of them and other multi-family properties.

What I want to discuss this month is how these smaller multi-family properties can become an affordable entry into homeownership. According to MLS Listings, the average duplex was sold for about $1.3 million in San Jose last year. Compare this to the average cost of a single family home last year of $1.6 million and I think you can see the value of these smaller multi-family properties.

So, let’s run the numbers.

For the sake of this example, we will use a 20% down payment and interest rate on a conforming loan of 6.5%. Your monthly payment on that $1.6 million single family home would be roughly $5,562. Now, let’s run a similar scenario for that $1.3 million duplex. Multi-family units have different loan limits for conforming loans. So in this case, we would still use 20% down, but the interest rate would now be 7.5%. The mortgage on your duplex would end up costing $7,272 a month.

Now, let’s look at what happens to your monthly expenses if you live in one side of the duplex and rent the other side out. The average rent for a 2 bedroom duplex is approximately $3,100 per month.  If you chose to live in one side of the duplex and rent out the other, you could substantially offset your mortgage. In effect, this lowers your monthly loan obligation by nearly 45%.

I was recently introduced to Lan. Lan is a Vietnamese refugee who came to San Jose in 1982. She was fortunate enough to find low-income housing so she could attend Evergreen Community College, where she ultimately received her AA degree.  After she received her degree, she landed a job at San Jose City College as an accounting clerk.  In 1986, a friend and neighbor in that same low-income housing suggested buying a duplex together.

It was just the opportunity Lan needed to get into homeownership. A year later, her friend wanted to move on so Lan and her husband assumed the loan and began to rent out the other side to offset that additional cost.

Tom is a commission-based salesman. He was tired of wasting money on rent and was looking for a home ownership opportunity, but a single family home was a bit out of his reach financially especially with a paycheck that was wildly unpredictable. So he started to look at his options and zeroed in on a triplex in San Jose.

He was able to purchase this with only 10% down, since he was living in one of the units as his primary residence. Renting out the other two units helped Tom significantly lower his financial risk and made homeownership a reality for him. His total monthly cost was a lot less than renting a studio or one bedroom apartment. Tom purchased that triplex in 2018 and was able to sell it three years later. The equity and wealth that was generated from that triplex gave him the financial resources he needed to buy his dream single family home.

Purchasing a small multi-family housing unit may not be for everyone, but it is at least an option to consider when looking into homeownership. If you are willing to reimagine what homeownership could be, it could be a tremendous opportunity for you to build generational wealth.  As always, it’s critical to work with a local REALTOR® and lender with expertise in the multi-family market.

San José Spotlight columnist Neil Collins is CEO of the Santa Clara County Association of Realtors, a trade association representing more than 6,000 real estate professionals in Santa Clara County and surrounding areas. His column appears every fourth Thursday of the month. Contact Neil at [email protected] or follow @neilvcollins on Twitter.