An Overlooked Opportunity in Real Estate

One of the little discussed opportunities in residential real estate is the small income property.  Whether a duplex, triplex or four-plex, it’s an excellent way to begin a real estate portfolio for the small investor or first time homebuyer.  If you qualify for a VA owner-occupied loan, you can purchase a duplex with a mortgage of up to $625,500 with zero down payment.   VA does require you to have six months in principal, interest, taxes and insurance in reserves.  If you’re worried about the monthly payment, VA  allows up to 75% of market rents for rental side income which is added to the owner’s income for qualifying for the mortgage.  The 25% of the non-allocated rents is to be reserved for maintenance, repairs and  vacancy.

               Not a veteran?  FHA has owner-occupied financing for only a 3.5% down payment.  Loan limits  are $497,000 for a duplex; $601,500 for a triplex and $747,500 for a four-plex.  For an owner-occupied duplex, there are also no reserve requirements. FHA also allows 85% of the market rent for rental income side.

               Fannie Mae and AHFC loan limits are even higher.  For a duplex , both will finance up to $800,775. AHFC will require a 10% down payment and Fannie Mae a 15% down payment. Both will require the buyer to demonstrate they have six months of reserves in cash.  That’s still an excellent investment opportunity with 30 year fixed rates still below 4%.  It seems like a first time homeowner or small investor couldn’t go wrong with one of these purchases.  The only problem is finding a property to purchase.  These loan limits are statewide and so there may be other opportunities around the state but in Anchorage, with a tight rental market, and sluggish building permits, even a good duplex is hard to find, particularly if you are looking for one that is less than ten years old.  The vast majority of our rental housing was built during the boom years of the l980’s.  Although for us long-time Alaskans that doesn’t seem that long ago,  the reality is these properties are now over 30 years old and have not only become cosmetically but functionally obsolete.

               Much of Anchorage’s multi-family acreage zoned R2, R3 or R4 has been taken up with condominium development the past fifteen years. Builders can earn an extra $10,000 to $15,000 per side by selling each side separately as a condo.  That’s an opportunity that’s hard to give up when you build for a living.  So the development of the owner-occupied rental properties is really left up to the owner-builder who has the time to search for that infill lot that larger builders tend to overlook because it’s inefficient to build only one building at a time.    Occasionally, you see a duplex or four plex popping up in Fairview or Spenard, both popular rental areas, where tear-downs are still reasonably priced.  It’s a good opportunity for the small investor and helps create more affordable housing in Alaska’s largest city.