Buying a building with two flats, can I rent one out and still get a residential mortgage?
It depends on the terms of the mortgage. Generally speaking, residential mortgages specifically prohibit letting out a property without the bank's express permission -- but as you say, that tends to assume that the whole property is being let, not just a part of it. Conversely, buy-to-let mortgages generally prohibit living in the property yourself! The final arbiter as to what is allowed under a mortgage is the mortgage provider; so the safest option is to speak to one or more banks, and see what they say. (Note that if you're changing the use of part of a property from business to residential, you may need to apply for permission; check with your local council.) I'd talk to a solicitor and see if you can structure the purchase in a way that breaks the property into three pieces. One would be the freehold of the whole building, one would be a long lease on the downstairs part (on which you would get a residential mortgage) and one would be a long lease on the upstairs flat (on which you would get a buy-to-let mortgage). Since there's essentially no price premium for freehold as opposed to long lease, you should be able to raise enough money from the two mortgages to fund the purchase. NO Even worse, most BTL(buy to let) lenders will not lend if you are going to be living in the property.    There are very few lenders that will touch something like this.    It is likely you will also need to use bridging for the time the building work takes at something like 1.5% per month! Try posting the question to http://www.propertytribes.com/ as there are a few UK mortgage experts on that site. The simple answer is to get a residential mortgage first, and once you have secured the loan, do whatever you want.  The bank only cares about what risk they are taking on the day of closing and won't care afterwards so long as you pay the mortgage on time. Residential mortgages are going to give you better rates than rentals, generally.
Think carefully about the added expenses.  It may still make sense, but it probably won't be as cheap as you are thinking.  In addition to the mortgage and property taxes, there is also insurance and building maintenance and repairs. Appliances, carpets, and roofs need to be replaced periodically.  Depending on the area of the country there is lawn maintenance and now removal. You need to make sure you can cover the expenses if you are without a tenant for 6 months or longer.  When tenants change, there is usually some cleaning and painting that needs to be done. You can deduct the mortgage interest and property taxes on your part of the building.  You need to claim any rent as income, but can deduct the other part of the mortgage interest and taxes as an expense.  You can also deduct building maintenance and repairs on the rental portion of the building.  Some improvements need to be depreciated over time (5-27 years).  You also need to depreciate the cost of the rental portion of the building.  This basically means that you get a deduction each year, but lower the cost basis of the building so you owe more capital gains taxes when you sell. If you do this, I would get a professional to do your taxes at least the first year.  Its not hard once you see it done, but there are a lot of details and complications that you want to get right. Your main choices are ISAs and property. You can put over £15,000 per year into an ISA, which means over £450,000 by the time you retire, not allowing for growth in your ISA investments. But if you're paying rent, and worried about being able to pay rent when you retire, the obvious choice is to buy a flat now on a thirty-year mortgage so that you can stop paying rent and the mortgage will be paid off by the time you retire. Your experience is anecdotal (outside Australia things are different). There are many companies and real estate investment trusts (REITs) that own residential properties (as well as commercial in many cases to have a balanced portfolio). They are probably more common in higher-density housing like condos, apartment buildings, flats, or whatever you like to call them, but they are certainly part of the market for single family units in the suburbs as well. What follows is all my own opinion. I have managed and rented a couple of properties that I had lived in but wasn't ready to sell yet when I moved out. In most cases, I wish I would have sold sooner, rather than renting them out. I think that there are easier/less risky ways to get a good return on your money. Sometimes the market isn't robust enough to quickly sell when it's time to move, and some people like the flexibility of having a property that a child could occupy instead of moving back in at home. I understand those points of view even if I disagree with them. You say  My work is steady; even if I lost my job it'd be easy to get another. Location has been static for a few years now, but I'm not sure that'll extrapolate to the future; I'm lazy, so I don't want to move, but for a significantly better job opportunity I wouldn't mind.   The general rule of thumb is that you'll come out ahead if you buy a house (with a mortgage) and live there for five years.  What you lose in interest, you make up in rent.  And living there for five years, you make back your closing costs in equity.  If you're there less than five years though, you don't make back the closing costs.  You'd have been better off renting.   Historically (up to about twenty years ago), your mortgage payment and rent payment for the same basic property would be about the same.  I.e. if your current landlord sold you what you are renting, your mortgage payment would be roughly the same as your rent.  Maybe a little lower or a little higher but about the same.  More recently, it hasn't been strange to see a divergence in those.  Now it is not uncommon for a mortgage payment to be 50% higher than rent on the same property.   This has some consequences.  First, your $1000 rent probably won't stretch as far as a $1000 mortgage payment.  So you'll be buying something that you'd only pay $650 or $700 rent.  Second, if you move and can't sell immediately, you'll get less in rent than you'd pay in mortgage.  Rather than contributing to your income, the property will require subsidy just to maintain the mortgage.  And in the early years of the mortgage, this means that you're paying all of the principal (equity) and some of the interest.   Buying a duplex makes this worse.  You have your side and their side.  You can substitute your $1000 rent for half of the mortgage payment.  Meanwhile, they are paying $700 in rent.  You have to subsidize the mortgage by $300.  Plus, you are talking about hiring a property management company to do things like lawn maintenance.  There goes another $100 a month.  So you are subsidizing the mortgage by $400.   I don't know real estate prices in Utah, but a quick search finds a median house price over $200,000.  So it seems unlikely that you are buying new construction with new appliances.  More likely you are buying an existing duplex with existing appliances.  What happens when they fail?  The renter doesn't pay for that.  The property management company doesn't pay for that (although they'll likely arrange for it to happen).  You pay for it.   Also, it often takes a bit of time to clean up the apartment after one tenant leaves before the new tenant starts paying rent.  That's a dead weight loss.  If this happens during a local recession, you could be carrying the mortgage on a property with no offsetting rental income for months.   There are some countervailing forces.  For example, if house prices in your area are increasing, the rent will increase with them (not necessarily at the same pace).  But your mortgage payment stays the same.  So eventually the rent may catch up with the mortgage payment.  If you wait long enough in a strong enough market, the rent on the other half of the duplex may cover the entire mortgage payment.   If you currently have an urban apartment within walking distance of work and switch to a suburban apartment with a commute, you have a better chance of finding a duplex where the entire mortgage payment is only the $1000 that you pay in rent.  Your half of the duplex won't be as nice as your apartment is, and you'll have a half hour or hour long commute every morning (and the same to get home in the evening).  But on strictly fiscal terms you'll be doing about as well.  Plus you have the income from the other half.  So even if your mortgage payment is more than your rent payment, you can still break even if the rent covers it.   Consider a $1400 mortgage and $400 in rent from the other half (after property management fees).  So long as nothing goes wrong, you break even.  Perhaps the agreement is that your parents take care of things going wrong (broken appliances, troublesome tenants, time between tenants).  Or perhaps you drain your emergency fund and adjust your 401(k) payment down to the minimum when that happens.  Once your emergency fund is replenished, restore the 401(k).   If you're willing to live in what's essentially a $500 apartment, you can do better this way.  Of course, you can also do better by living in a $500 apartment and banking the other $500 that you spend on rent.  Plus you now have the expenses of a commute and five hours less free time a week.   You describe yourself as essentially living paycheck to paycheck.  You have adequate savings but no building excess.  Whatever you get paid, you immediately turn around and spend.  Your parents may view you as profligate.  Your apartment is nicer than their early apartments were.  You go out more often.  You're not putting anything aside for later (except retirement).   It didn't use to be at all strange for people to move out of the city because they needed more space.  For the same rent they were paying in the city, they could buy a house in the suburbs.  Then they'd build up equity.  So long as they stayed in roughly the same work location, they didn't need to move until they were ready to upgrade their house.   The duplex plan leads to one of two things.  Either you sell the duplex and use the equity to buy a nicer regular house, or you move out of the duplex and rent your half.  Now you have a rental property providing income.  And if you saved enough for a down payment, you can still buy a regular house.   From your parents' perspective, encouraging you to buy a duplex may be the equivalent of asking you to cut back on spending.  Rather than reducing your 401(k) deposits, they may be envisioning you trading in your car for a cheaper one and trading in your nice but expensive apartment for something more reasonable in a cheaper neighborhood.  Rather than working with a property management company, you'll be out doing yardwork rather than cavorting with your friends.  And maybe the new place would have more space to share when you meet someone--you aren't going to provide many grandkids alone.   If you get a mortgage on a duplex, you are responsible for paying the mortgage.  You are responsible even if something happens to the house.  For example, if a fire burns it down or a tornado takes it away.  Or you just find that the house isn't solid enough to support that party where all of your friends are jumping up and down to the latest pop sensation.  So beyond losing whatever you invest in the property, you may also lose what you borrowed.   Now consider what happens if you invest the same amount of money in General Motors as in the house.  Let's call that $10,000 and give the house a value of $200,000.  With General Motors, even if they go bankrupt tomorrow, you're only out $10,000.  With the house, you're out $200,000.  Admittedly it's much hard to lose the entire $200,000 value of the house.  But even if the house loses $80,000 in value, you are still $70,000 in the hole.   You don't need a disaster for the house to lose $80,000 in value.  That's pretty much what happened in the 2006-2010 period.  People were losing all of what they invested in houses plus having to declare bankruptcy to get out of the excess debt.  Of course, if they had been able to hold on until 2015 markets mostly recovered.  But if you lost your job in 2008, they wouldn't let you not make mortgage payments until you got a new one in 2012.   When you declare bankruptcy, you don't just lose the house.  You also lose all your emergency savings and may lose some of your belongings.   There are some pretty prosaic disasters too.  For example, you and your tenant both go away for a weekend.  It rains heavily and your roof starts to leak due to weak maintenance (so not covered by insurance).  The house floods, destroying all the electronics and damaging various other things.  Bad enough if it's just you, but you're also responsible for the tenant's belongings.  They sue you for $20,000 and they move out.  So no rent and big expenses.  To get the house livable again is going to take $160,000.  Plus you have a $190,000 mortgage on a property that is only worth about $40,000.  That's at the extreme end. "I'd probably say ""buy"" for most situations. Unless you have a long-term lease, you're going to be saddled with elastic/rising rents if the market tightens up, while with a purchase you usually have fixed expenses (with the exception of property taxes/condo fees) and you are gaining equity. As I've gotten older, the prospect of moving is more and more daunting. The prospect of being essentially kicked out of my home when the landlord decides to sell the property or raise the rent is a turn-off to me." "If I buy property when the market is in a downtrend the property loses   value, but I would lose money on rent anyway. So, as long I'm viewing   the property as housing expense I would be ok. This is a bit too rough an analysis.  It all depends on the numbers you plug in.  Let's say you live in the Boston area, and you buy a house during a downtrend at $550k.  Two years later, you need to sell it, and the best you can get is $480k.  You are down $70k and you are also out two years' of property taxes, maintenance, insurance, mortgage interest maybe, etc.  Say that's another $10k a year, so you are down $70k + $20k = $90k.  It's probably more than that, but let's go with it... In those same two years, you could have been living in a fairly nice apartment for $2,000/mo.  In that scenario, you are out $2k * 24 months = $48k--and that's it.  It's a difference of $90k - $48k = $42k in two years.  That's sizable. If I wanted to sell and upgrade to a larger property, the larger   property would also be cheaper in the downtrend. Yes, the general rule is:  if you have to spend your money on a purchase, it's best to buy when things are low, so you maximize your value.   However, if the market is in an uptrend, selling the property would   gain me more than what I paid, but larger houses would also have   increased in price. But it may not scale.  When you jump to a much larger (more expensive) house, you can think of it as buying 1.5 houses.  That extra 0.5 of a house is a new purchase, and if you buy when prices are high (relative to other economic indicators, like salaries and rents), you are not doing as well as when you buy when they are low.   Do both of these scenarios negate the pro/cons of buying in either   market? I don't think so.  I think, in general, buying ""more house"" (either going from an apartment to a house or from a small house to a bigger house) when housing is cheaper is favorable.  Houses are goods like anything else, and when supply is high (after overproduction of them) and demand is low (during bad economic times), deals can be found relative to other times when the opposite applies, or during housing bubbles.   The other point is, as with any trend, you only know the future of the trend...after it passes.  You don't know if you are buying at anything close to the bottom of a trend, though you can certainly see it is lower than it once was.   In terms of practical matters, if you are going to buy when it's up, you hope you sell when it's up, too. This graph of historical inflation-adjusted housing prices is helpful to that point:  let me just say that if I bought in the latest boom, I sure hope I sold during that boom, too!" This may effect how much, or under what terms a bank is willing to loan us I don't think this is likely, an investment is an investment whether it is money in a savings account or a loan. However, talk to your bank. Is it worth getting something by a lawyer? Definitely, you need a lawyer and so do your parents. There is a general presumption at law that arrangements between family members are not meant to be contracts. You definitely want this to be a contract and engaging lawyers will make sure that it is. You also definitely want this to be a proper mortgage so that you get first call on the property should your parents die or go bankrupt. In addition, a lawyer will be able to advise you of the pitfalls that you haven't seen. If both of my parents were to pass away before the money is returned, would that document be enough to ensure that the loan is returned promptly? No, see above. Tax implications: Will this count as taxable income for me? And if so, presumably my parents can still count it as a tax deduction? Definitely, however the ATO is very keen that these sorts of arrangements do not result in tax minimisation. Your parents will get a deduction at the rate charged; you will pay tax on the greater of the rate charged or a fair commercial rate i.e. what your parents would be paying a bank. For example, if the going bank mortgage rate is 5.5% and you charged 2% they get the deduction for 2%, you pay tax as though they had paid 5.5%. Property prices collapse, and my parents aren't able to make their repayments, bank forecloses on the place and sells it, but not even enough to cover the outstanding loan, meaning my parents no longer have our money. (I could of course double down and pay their monthly repayments for them in this case). First, property prices collapsing have no impact on whether your parents can pay the loan. If they can it doesn't matter what the property is worth. If they can't then it will be sold as quickly as possible for an amount that covers (as far as possible) the first mortgagee's indebtedness.  It is only in reading this far that I realise that there will still be a bank as first mortgagee. This massively increases the risk profile. Any other risks I have missed? Yes, among others: Any mitigations for any identified risks? Talk to a lawyer. Talk to an accountant. Talk to an insurance professional. Anything I flagged as a risk that is not actually an issue? No Assuming you would advise doing this, what fraction of savings would you recommend keeping as a rainy day fund that can be accessed immediately? I wouldn't, 100%. Or you could flip houses. i'm not sure where you live but hwere im from its not uncommon to buy a house for 5k or a duplex for 8k. put about 4k into it and charge about 600 rent. or put 4k into the 8k, thats 12k sell it for 20. if it takes a year that's a 66% return on your investment in one year. and its small risk. also, if it doesnt sell, youre still renting it out with month to month or 3-6 month leases.