Multifamily Homes: Make Your House Pay For Itself

There are some factors you need to consider when it comes to a multifamily home.

It might be easier to get a higher residential mortgage for a 2–4-unit property based on the rent it generates. The rental income you get from the 2–4-unit property might cover or reduce the mortgage. Which allows you to build home equity pretty fast. 

Many lenders are going to require you to show property management experience, prove that you have enough savings that are enough to cover mortgage payments for several months and submit to tougher underwriting standards.

The mortgage lender is going to look at one-to-four-unit properties as your primary residence provided you are going to live in one of them. This means you are eligible for government loans that need the applicant to live on the property.

A Multifamily Home Delivers Great Value

There are two factors that have dominated the real estate market today: the growing need for rentals and shortages of available properties. If you are in this situation, you should leverage it. When buying your primary residence, you need to take full advantage of the competition for housing.

multifamily home

The Advantages

There are a lot of benefits you stand to gain. It is easier to get a higher residential mortgage on a 2-4-unit property based on the rent it brings. When you combine the right property with the right loan, you can put as low as 3.5% as a down payment, even if you don’t have the perfect credit score.

The rental income you get from the 2-4-unit property can be enough to pay for the mortgage or even reduce your mortgage. This is good news because it allows you to build home equity.

When dealing with a multi-unit building, you get higher loan limits because the loan maximums tend to be higher compared to single-family homes.

The Disadvantages

There are many benefits of multifamily housing, but it is also important to know the drawbacks. If this is your primary residence, it means you are going to live close to your tenants. There is less privacy when compared to a single-family home, which can force you to know each other intimately.

You will be sharing common spaces such as the decks, yards, storage areas, parking, and pools.

Your primary clients are your tenants, and they see renting as a business transaction. This means they can start making demands. When a unit needs to be repaired, the tenant is going to come to your house and knock, and they can do it even at midnight.

The Costs

Your monthly costs – property taxes, utilities, maintenance, and mortgage payments – are going to be higher compared to a small single-family home.

You also need to set aside some money to use in replacing items when they wear out. It is easy to replace your own dishwasher, but that is hard when it is your tenant.

What is going to happen when one or two of the units are vacant? Your expenses are going to remain the same even if the units are empty.

This is why many lenders are going to ask you to show property management experience, show that you have savings that can cover mortgage payments for a few months, and also submit to tougher underwriting standards.

Where is the Best Place to Buy a Multifamily Home?

Do a lot of market research. Look for somewhere that you are going to stay long-term, because the cost associated with buying, moving, and selling adds up and takes a huge chunk from your profit.

The quality of the neighborhood is going to determine the tenants you attract. Look at things like crime rates and school ranking. You can easily research vacancies, rents, and future developments through the internet. Look at the stability of the neighborhoods so you can have a stable rental income.

Look at the local amenities and the job market. Choose a building that is going to make commutes from school and work easier. Research so you end up with the right property.

Financing Multifamily Homes

If you live in one of the units in a one-to-four-unit property, then the lender can consider it a primary residence. This means you can apply for government loans that require you to live on the property.

You have to pass a CAIVRS check before you can get government loans. This verifies that you have not defaulted on government loans, e.g. back taxes and student loans.

Most lenders will want someone who has experience as a landlord, property manager, or related experience needed to manage a property. The lender is also going to require the borrower to have cash reserves that can cover the payments for six months in the event the units don’t get rented.

FHA vs. VA

FHA programs let you buy a home by putting as low as 3.5% as a down payment, as long as you have a credit of 580 or more. If it is between 500 and 579, the down payment is 10%.

VA offers 100% financing and you can have as many as four units. There are special guidelines with VA loans where two or more VA-eligible veterans can purchase multifamily property using their eligibility. 

With these rules, it is possible to buy four family units (for example a four-plex), one business unit, and also one more unit for each veteran who is part of the ownership (this ends up being six residential units and an office for two vets)

Conventional Mortgages (non-government)

Conforming lenders (Freddie Mac and Fannie Mae) will ask for a higher down payment – 25% for three-to-four-unit properties and 15% for a duplex if you choose a fixed-rate loan.

There are some programs that specialize on rental residential lending and your loan can be approved based on the income-producing value of a property.

There are some programs that don’t require you to live on the property. In such cases, personal income is not a big factor or even a credit rating.

The important thing is for the property to generate income that covers the costs. The lender is going to ask for special legal entities to ensure that the rent is going to pay the mortgage.

What is the Mortgage Rate Today?

The rates on multifamily units can be higher compared to single-family homes. They are considered income property, which is more risky for the lender. It becomes cheaper to buy a home when you have tenants helping with the mortgage payments. Are you ready to see what you can afford? It takes less than 30 seconds to see a variety of rate and closing cost options. They are custom to your situation and its FREE to use!