Tips & News

What is a Multi-Family Property?

First, let’s define what a multi-family home is. It’s multiple living units (as few as two) with separate entrances and exclusive living areas. Duplexes, triplexes, and fourplexes all fit this definition. (Properties with five or more units are considered commercial real estate, but properties with four or fewer are considered residential when it comes to financing.)

What is Your Goal?

If you’re buying an entire unit as an investment property, you don’t have nearly as many options as you do if the unit is partially occupied by the owner.

If it’s strictly an investment, you don’t have access to government-guaranteed loans like FHA and VA loans, which can make it easier for you to buy a multi-family property.

Additionally, you’ll need a higher down payment and will pay higher interest rates. For the remainder of this article, I’ll be talking about multi-unit loans where the owner is occupying one unit.

What are the Advantages of a Multi-Family Property?

If you’re considering getting a mortgage to pay for a multi-family property, you may be wondering what benefits you’ll enjoy thanks to your investment. Here are a few of the best reasons to buy a multi-family property.

• Get rental income to help pay for a mortgage – This is also sometimes called “house hacking.” If you choose to buy a home like a duplex and live in one of the units of a multi-family property, you can use the rental income from the other unit to help cover your mortgage and other costs, reducing your overall costs.
• Great way to get started in real estate – By purchasing a duplex, triplex, or other multi-family property, you can learn more about the basics of real estate investing, and if you choose to live in one of the units, you’ll also be able to benefit from some tax deductions and lower down payments.
• Low down payments in some cases – As mentioned, some programs like the Home Possible Program from Freddie Mac allow you to put as little as 5% down. If you are planning to live in one of the units of a 1-4 unit home, you can qualify for low down payments, just like in a traditional residential mortgage.

Down Payment

It depends on the loan program, but you’ll usually have to put more down for a multi-unit mortgage that you’d have to for a single-family home, which can require as little as 3% down.

Typical down payments for multi-unit conventional loans are:

Duplex, 15% of the purchase price

Triplex, 20% of the purchase price

Fourplex, 25% of the purchase price

If you qualify for an FHA or VA loan, you’re in luck with the down payment. FHA loans require just 3.5% down, while VA loans allow for 100% financing.

A side note: Freddie Mac’s Home Possible program does allow you to finance 1- to 4-unit properties with just 5% down, but it does have income limits.

Depending on the loan program, a parent or relative may be able to kickstart your investment by providing a percentage of the down payment funds.

Maximum Loan Limits

Another plus to getting a multi-family property is that you can get a more expensive property without heading into jumbo loan territory (which comes with higher interest rates). More units equals a higher lending limit.

In 2019, that limit is usually $484,460, but it goes higher with more units—up to $931,600 for four units. However, these numbers are higher for more expensive parts of the country.

What Types Of Loans Can Be Used For A Multi-Family Property?

This primarily depends on how many units are included as part of your multi-family property.

• Standard residential loans for 2-4 units – As long as you are occupying one unit, you can access standard residential loans including FHA and VA loans, which are significantly easier to get compared to investment loans.
  However, if you are not living in one of the units, you do not qualify for these loans, and will instead need to seek an investment property loan. Since you won’t be a resident, residential loans are not applicable.
• Investment property loans for 5+ units – Even if you plan to live in a unit, you will no longer qualify for residential loans if you purchase a residential property with 5 units or more. These loans are often harder to qualify for.

Income—and Can You Use Rental Income to Qualify?

Obviously, you’ll need a higher income to qualify for a bigger loan. That begs the question: can your new rental income be used to help you qualify.

As usual, it depends. Guidelines vary, but typically you’ll need to have some sort of landlord experience under your belt. This shows us that you can consistently collect rent and find good tenants.

Even so, you can usually use only 75% of rental income as qualifying income (to account for maintenance and vacancies), and you’ll usually need to have signed leases in hand.

Potential Drawbacks of Getting A Mortgage For A Multi-Family Property

Wondering if there are any drawbacks you should know about if you’re planning on getting a mortgage for a multi-family property? There are, and they should be considered carefully before you make your investment.

• Managing tenants – If you find great tenants, this is not too difficult, but it is still some extra time taken out of your day. You’ll need to collect rent, write leases, find tenants, schedule repairs and maintenance, and perform other routine tasks. If you’re not ready to be a landlord, owning a multi-family property may not be a good option.
• Additional repair and maintenance costs – Multi-family properties involve a lot more maintenance and repairs, since each unit contains its own plumbing, electrical systems, gas lines, and other utilities. You’ll need to take this into account when budgeting.
• Better credit is required – Fannie Mae, for example, requires a 680 credit score and a 15% to 25% down payment for multi-family properties – but only a 620 score for single-family properties.

Interested in Purchasing a Multi-Family Unit?

Are you interested in purchasing a multi-family unit? It can be a smart investment strategy that will pay off for years to come. If you have any questions about what a mortgage might look like for you, give me a call! I’m here to help.