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Multifamily Homes: Make Your House Pay For Itself

When considering a multifamily home, there are several factors to look at:

  • It’s common for lenders to make applicants prove they have enough savings to cover multiple months of mortgage payments or give tougher underwriting standards.
  • For any one-to-four-unit property, lenders typically consider it as a primary residence if you plan to live in one of the units. This will allow you to apply for government loans which require the applicant to live in the home.
  • It’s sometimes easier to get a higher mortgage on a 2–4-unit property because of the rental income that can be generated. The extra income from the unit rentals can help cover or reduce your mortgage and will build your equity on the home.

Multifamily Homes Give Great Value

The shortage of multifamily homes and the growing need for multifamily homes are two factors that are dominating today’s real estate market. You can leverage this if you are in this situation. You can take advantage of the housing competition and consider multifamily homes for your primary residence.

The Advantages

There are many advantages and benefits to doing this. You can get a higher residential mortgage on a 2–4-unit property because lenders will base it on the rental income generated. When you combine the right property with the right loan, you can end up putty down as little as 3.5%, even with well below-average credit.

The rental income that you can collect on a 2–4-unit property can either completely cover or greatly reduce your mortgage and help you build up equity.

You will also have access to larger mortgage loans for multi-unit properties because the loan maximums are higher for single-family homes.

The Disadvantages

While we looked at some of the benefits of multifamily housing, there are some drawbacks to it. Because this will need to be your primary residence, that means you will be living near your tenants. Since there is less privacy than in a single-family home, you will get to know each other.

You will also be sharing common spaces like parking, pools, decks, yard space, and even storage areas.

When renting, tenants see this as a business transaction; remember tenants are your clients for this business. Because this is a business transaction, tenants may make demands. Consider if a unit needs a repair, a tenant may knock on your door- at midnight if necessary.

The Costs

Your monthly costs- property taxes, utilities, maintenance, and mortgage payments- will more than likely be higher than a smaller single-family home.

You may also want to set aside money to replace items that are worn out. While it is possible to hold off on replacing your dishwasher, you can’t hold off on replacing your tenants’.

You also need to look at what happens if any of your units have a vacancy. Even with an empty unit, your expenses will not stop.

Because of this potential problem, most lenders will require that applicants need to have property management experience or prove that they have enough savings to cover the mortgage. They can also put tougher underwriting standards on your mortgage.

Where Should You Buy Your Multifamily Home?

It’s very important to research markets carefully. Since the cost of buying, selling, and moving takes a huge amount out of your potential profit, you’ll want to buy somewhere you don’t mind staying long-term.

You need to look at school ratings and crime rates for the neighborhood because the quality of the neighborhood is the type of tenants you will attract.

You can easily do some online research on vacancies, rents, and future development. Consider the stability of the neighborhood to make sure you will maintain ample rental revenue.

Research the property’s local amenities and the job market. It’s better in the long run to purchase a property that has a short commute time for work and school. You will want to do careful research to make sure you are buying in the right area.

How to Finance Multifamily Homes?

As long as you intend to live in one of the units, mortgage lenders consider any one-to-four-unit property as a primary residence. Because this is considered a primary residence, you can apply for government loans that require the applicant to live in the home.

You will need to pass a CAIVRS check to be eligible for any government loans. This will verify that you are not on any databases for people who have defaulted on government loans, like back taxes or student loans.

It’s common for lender guidelines to require a previous landlord or property management experience to count your rental income when qualifying for a mortgage. You will also need to prove that you have enough money to cover six months’ mortgage in case you do not have any rental income.

FHA and VA

As long as your credit score is 580 or higher, you can get an FHA loan with as little as 3.5% down. You will need 10% down if your credit is between 500 and 579.

There is 100% financing with the VA and they allow up to four units. The VA has special guidelines for loans if two or more VA-eligible veterans all use their eligibility, they can purchase the multi-family property.

So, under the VA rule, they can buy four-family units, one business unit, and one additional unit for each veteran that participates in the ownership. That will be six residential units and an office for two veterans.

Conventional Mortgages

Conforming lenders, like Freddie Mack and Fannie Mae, have higher down payments. There is a 15% down payment for a duplex and a 25% down payment for three-to-four-unit properties when using fixed-rate loans.

Other programs specialize in rental residential lending and can approve your loan on the income-producing value of the property.

This means that you don’t have to live on the property like other programs require you to. Your personal income and credit rating are less of a factor.

The property must generate enough revenue to cover all of the property’s costs. Lenders will force special legal entities to guarantee that the mortgage is paid directly from the tenant’s rent.

What Are Today’s Mortgage Rates?

Mortgage rates for multifamily properties tend to be slightly higher than mortgage rates for single-family homes. This is due to the homes being used as income properties which typically adds more risk for the lender.

It can also be cheaper to purchase a home if you have tenants that can help you pay your mortgage.

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