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Buying to Rent: The Complex Issue of Duplex Ownership

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SAMPLE RENTAL PROPERTY - 60 Railroad Street, Johnson, $198,000  - Listed by Preferred Properties - COURTESY OF ASHLEY WISHINSKI
  • Courtesy Of Ashley Wishinski
  • SAMPLE RENTAL PROPERTY
    60 Railroad Street, Johnson, $198,000
    Listed by Preferred Properties

Perhaps you've seen the show "Income Property" on HGTV, in which the affable host, self-taught real estate mogul Scott McGillivray, helps first-time home buyers turn part of their new abode into an income-producing apartment. Within each half-hour episode, the show's participants find themselves in a renovated two-family residence with the promise of rapid home equity. Audiences are left wondering if they, too, can make the move to easy street.

The reality is not as simple as HGTV makes it out to be, of course. Owning and managing an investment property requires a lot of patience, preparation and calculation. Income properties work best for those willing to do their homework.

Ashley Wishinski, a real estate agent at Preferred Properties and CEO/owner of Fusion Property Management, is a BTV version of HGTV's McGillivray. Wishinski has been turning real estate into rental income since she turned 21 in 2007. Back then, she bought her first property, a condo in Winooski, with no money down through the Vermont Housing Finance Agency. The particular lending program she used no longer exists, but other state and federal options abound.

"I knew I'd have to live somewhere," Wishinski explains. "Why not pay down my own mortgage instead of paying down my landlord's mortgage?"

Ashley Wishinski
  • Ashley Wishinski

Two years later, with 3.5 percent down, she added an Onion City duplex to her budding portfolio. Wishinski covered her mortgage by having a roommate, as well as a tenant. She went on to buy a single-family home in 2010 with an attached apartment and soon thereafter made the leap into "full-on rental properties," she says, in addition to multiunit buildings.

Today, Wishinski and her husband and business partner, Bruce, pay a monthly mortgage of $800 on a primary residence worth more than $330,000, and they enjoy substantial returns on their other properties. She cites several reasons income properties make a solid investment for like-minded people: The principal is paid down by your tenants' rent, property appreciates over time, and there is generally a positive cash flow after expenses.

In this post-real-estate-bubble market, investors do need some cash to get the ball rolling — and keep it going. According to Jeff Smith, director of credit administration with NorthCountry Federal Credit Union, "Buyers must have assets for both down payments and reserves, as well as sufficient income."         

Smith cautions that first-time investment-property buyers must qualify for the loan using only their existing income.

"Even though the property being purchased will generate income for the applicant, the income cannot be used to help them qualify," he explains. "An applicant is not able to use proposed rental income in a purchase situation until they can demonstrate previous rental experience by showing rental income on their federal income tax returns."

Down-payment requirements fluctuate by property. "Buying a primary residence can require as little as 3 percent down," Smith notes. "Buying an investment property can require 15 to 25 percent down, depending upon qualifying criteria and number of units."

To complicate matters, there is the precise issue of ownership. Smith reports that borrowers can qualify for conventional financing if they will personally own the property. But buyers who create a limited liability company for legal protections may find themselves outside of conventional financing options and in the commercial realm. Additionally, he says, anything over four units is truly considered a commercial property and is not eligible for the same financing options. 

Smith advises consulting with a real estate lawyer to understand the legal risks and tax implications associated with investment properties.  

DREAMSTIME/ BENCHART
  • Dreamstime/ Benchart

Ashley and Bruce Wishinski owned and operated their properties for five years before creating Fusion Property Management in 2013. In addition to managing their own real estate investments through the company, they provide services to others who are less keen on the day-to-day nitty-gritty of management.

Becoming a landlord is itself a serious business. Wishinski recommends having a solid plan to ensure that "the property is run as a business, not a hobby." 

"You've got to be prepared to solve issues, especially related to safety concerns, for your tenants," she explains. "Different towns and states can have specific rules to properties in their locations. It's super important to understand and follow all the laws."

The Vermont Department of Housing & Community Development offers resources and links to housing codes and fair-housing laws. Also, the Vermont Apartment Owners Association helps landlords navigate information, forms and ordinances. The Burlington Housing Authority outlines all the rules and regulations pertaining to affordable housing (Section 8) properties.

The bottom line is that investment properties should be considered part of a long-term financial strategy, not a quick fix.

Burlington couple Deb Lichtenfeld and Jeff Schulman owned a downtown duplex for 20 years. They lived upstairs; mortgage-covering renters were on the ground floor. As landlords, they held up their side of the bargain by keeping the property in good working order, and they enjoyed the company of a number of long-term, responsible tenants.

In the end, even with capital-gains tax, explains Lichtenfeld, selling the property afforded the couple and their three kids "the opportunity to buy the single-family home of their dreams."

Ashley Wishinski offers Rental Income Workshops at Preferred Properties every other week. Learn more at meetup.com/realestatefreedom.

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