How Buying a Bigger House Can Actually Save You Money

updated Jun 2, 2020
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(Image credit: Caitlyn Cartlidge)

It might sound counterintuitive, but buying a bigger home than you need or even a multi-family home (like an apartment building, two- or three-flat, or a brownstone) with units carved out could help you save some cash. Before you groan about having more bathrooms to clean, hear us out! With more rooms or units, you can take on renters to help offset your monthly mortgage and utility costs, putting money toward the principal of the loan while your property’s value (hopefully!) climbs.

This strategy does mean you become a live-in landlord. Knocking on your roommate-tenant’s bedroom door when rent is late? Yeah, that’s awkward (but also avoidable as the real estate pros are about to teach us).

If you’re ready to take a go-big-and-go-home approach to homeownership, here are a few pointers from experts to help navigate the process and avoid roommate drama.

Know what you can afford

If you plan to purchase a spacious, single-family home and rent out a room or two while living in the house, you won’t be able to use that future rental income to qualify for your mortgage.

But, if you purchase a multi-family home—and one of the units in the duplex or the building is your primary residence—lenders can take projected rental income into consideration.

“It does vary a bit depending on the lender and market; sometimes lenders will need tenants to be in place with leases before they’ll count the rental income, others will accept market rental potential whether or not tenants are physically there already,” explains Kate Ziegler, an investor, entrepreneur, and a realtor with Arborview Realty in Boston.

Ziegler has personal experience with “house hacking”—a real-estate power play in which you live in one unit, and rent out others to cover your mortgage. She and her husband purchased their first home in 2013, which is a three-family building in Boston’s Jamaica Plain neighborhood. They inherited tenants in two units, and moved into the vacant unit in the three-decker.

Ziegler suggests that before you buy a multi-family home, you consider the “worst-case scenario” when it comes to covering your mortgage.

“Vacancies happen, and you need to be prepared to cover your whole mortgage for some amount of time just in case,” she says. “Find a lender who will discuss various options for your goals, and trust your numbers.”

Choosing between a big single-family home or a multi-family unit

Over the course of four years, Ziegler and her husband fixed up their property and it appreciated by more than 50%. The two discovered a knack for landlording and a love for real estate. They ultimately leveraged the first multi- to buy another. Her husband left his 9-to-5 as a software engineer to a launch a new real estate startup, manage the property, and do renovations.

“When we started down this path, no one—even in the industry—understood what we were trying to do,” she says. “But, more and more young buyers are expressing interest in offsetting their housing costs with rental income, and it is possible.”

Fair warning: Finding a multi-family home to purchase can be difficult. In Zeigler’s case, she and her husband searched and submitted offers for 18 months. They had narrow criteria, but were also competing with developers as many multis- are getting converted into condos.

Another option, though, is purchasing a house bigger than what you need and renting out rooms.

Wes Woodruff, a licensed mortgage advisor with Angel Oak Home Loans in Atlanta, says he recently had a client purchase a $600,000 home in an area with rapidly appreciating prices. The monthly payment is $3,500 per month, but the owner has three roommates paying $900 a month, which leaves the owner with $800 a month to chip in. Plus, his mortgage interest is a tax write-off, and property taxes and homeowner’s insurance can be a write-off for landlords, too, Woodruff points out.

“I think it’s a great idea for people to consider—particularly for young single people,” Woodruff says. “You can live with friends. You can have a dog. You can have cookouts. And, at the same time, you can build a lot of wealth by having other people pay at least a share of the mortgage.”

Managing roommates

Setting up expectations is key to all landlord-tenant relationships, but it’s especially important for tenants who are also roommates, points out Ziegler.

You need to consider an extra layer of circumstances: Who is responsible for shoveling the snow; is the tenant expected to handle landlord chores when you’re on vacation; what about being available to meet the plumber; and who has a say in paint colors?

“Remember that though it’s your home, it is also home for someone else, and you as the landlord are responsible for affording their peace and quiet as well,” she says.

Have a lease and consider a property manager

Even if your tenant is your roommate, have a lease, Ziegler says. (Yes, even especially if that tenant-roommate is your BFF).

“Lease agreements protect everyone involved by stating expectations and setting legal roles,” she says.

Evan Roberts, a real estate agent with Dependable Homebuyers in Baltimore, Maryland, suggests his clients who go the multi-family route to still hire a property management company.

“Understanding how to screen tenants is a skill that takes years to perfect,” Roberts says. “Having a management company will reduce the chances of a bad tenant slipping through the application process. They also know the best ways to market a property, helping you find a tenant quicker than on your own.”

Having a property manager will also act as a buffer so that grievances and requests go to them instead of the tenant bothering you.

“The tenants don’t even have to know that you’re the owner while you live with them,” he says. (Sneaky, right? But that also means you’re not the one who is getting an early morning knock on the door if, say, a garbage disposal breaks).

Also, tenants who rent through a professional management company are less likely to push boundaries like paying rent late, Roberts says.

Another option which can save some money but alleviate you of onerous landlord tasks is to try a service like Avail, which is designed for DIY landlords, and can automate time-consuming tasks like collecting rent, finding and screening tenants, and managing maintenance issues.

So, are you convinced landlording should be your next side hustle?