Today I’m sharing how first-time buyers can use ADUs to help pay down their mortgage.
Welcome to part one of my new series on how to retire without savings through real estate. This information can benefit anyone, including millennials who have just purchased or are about to purchase their first homes. A quick note before we settle into today’s topic: Remember that we do have down payment assistance programs for first-time buyers through FHA and conventional loans which only require 3% to 5% down. One way new homeowners can utilize real estate is by having tenants essentially pay their mortgage for them. This can be achieved through a combination of mortgage interest deductions and accessory dwelling units (ADUs).
Let’s say that you have a mortgage PITI (principal, interest, taxes, and insurance) of $2,800, and that home can be rented out for $2,500 or $2,600. Well, the deduction on the interest rate and then on the property tax will mean your PITI will be lowered.
If it’s 20% on the federal tax and then 5% on the state tax, then from $2,400 in interest you can deduct roughly $600. Now you’re looking at $1,800 instead of $2,400. This means that renters could cover your mortgage for you if they rent for $2,500 or $2,600.
The ADU law has changed the whole landscape for first-time homebuyers. If you purchase a home that has a garage, you can convert it into a rental unit complete with a kitchen, bath, and its own water heater and electric meter. So already you’ve turned an existing space into rental. Then, the ADU law allows you to build an addition to the main house with its own separate entrance up to another 500 square feet to 1200 square feet (whatever you can afford).
So, you could have a total of three units: the owned one in which you live and two rentals.
My friend’s kids are single and rent out their main house while living in an ADU so that the tenants pay down their mortgage.
Stay tuned, because in the coming video messages I will break down the mechanics of how to do this and share more specific numbers. Until then, feel free to reach out to me by phone or email if you have any further questions. I always love hearing from you.