Buy a duplex, triplex or fourplex and let your tenants pay your mortgage

Home plus investment: Why you should buy a duplex

You’d like help with your monthly housing costs, but don’t want a roommate. You want to invest in real estate, but rental properties can be difficult to finance. Why not buy a duplex and rent out the second unit? With the right home loan, you can buy both a residence and rental — with as little as 3.5 percent down.

Many people just like you are doing it right now. Multi-family residences — duplexes, triplexes and four-plexes — make up nearly 20 percent of all rental units in the country. And today’s low rates can help you increase the return on your investment.

Loan options for multifamily homes

If you buy a one- to four-unit rental property with a conforming residential mortgage, you’ll need at least 25 percent down. Lenders also require emergency savings to cover at least six months of payments.

But if you occupy one of your units, the property can be financed as a primary residence. Programs backed by the FHA, VA, Fannie Mae and Freddie Mac allow you to use part of the rental income (usually 75 percent) to qualify for your home loan.

Downpayment requirements range from zero for a VA loan to 3.5 percent for an FHA to five percent for a conforming home loan.

Interest rates and loan fees when you buy a duplex are similar to those of single family homes. There may be some risk-based surcharges, and your property appraisal will cost more, but terms are much better when you live in one of the units than when you don’t.

Bruce Ailion, attorney and Realtor with RE/MAX Town and Country in Atlanta, notes another advantage — that maximum loan amounts are higher for two- to four-family homes.

“In my Atlanta market,” Ailion says, “The loan limits for a conforming Freddie, Fannie or VA loan or an FHA loan on a duplex are $533,850 and $459,300, respectively; on a fourplex, they’re $801,950 and $690,000, respectively.”

Return on investment

The less you pay for your financing, the better the return on your investment. Because financing for primary homes is cheaper, living in one unit gives you an advantage over other investors.

“You can borrow possibly with only five percent down at approximately a four percent interest rate and buy a property that may generate at least a seven percent rate of return annually, which greatly magnifies the return on your equity invested,” says Ailion.

“Consider that, in Atlanta, the average annual return on a rental duplex is 8 to 14 percent once the loan is paid off.”

Affordability

According to the Urban Institute, purchasers of multi-unit homes tend to have lower incomes and credit scores than buyers of single-family properties. The income from the extra units helps them qualify for mortgages.

These additional strategies can help you buy a duplex or other multi-unit property if money is tight:

• Convince a partner to co-invest with you and share the mortgage costs.
• Look at distressed rental properties, which may be discounted.
• Do some research and find markets where rental rates are high but multifamily home prices are low.
• Consider adjustable rate mortgage (ARM) with an extended introductory period. Rates are lower than 30-year fixed loans and can be fixed for three-to-ten years before adjusting.

On the other hand, if you can afford the payment for a 15-year mortgage, you get a lower interest rate and can own your investment outright in half the time.

Being a landlord

Before you buy a duplex, make sure you have the time, skills and patience to be a live-in landlord.

“The job comes with many risks, including the ability to repay, cost of maintenance, plumbing repairs needed, electric blackouts, appliances that break, local and state regulations, fire codes, and taxes and insurance required,” says Arik Kislin, real estate developer and CEO of New York City-based Linx Industries.

Expect tough stuff. And if you can’t handle it, add management fees to your potential expenses when you evaluate a property.

“If they don’t pay the rent, can you evict a family with a pregnant woman or a single mother who spent rent on a car repair so she could keep her job? Or what if you get a tenant who is abusive to their spouse, is an alcoholic, becomes a hoarder or files bankruptcy?” asks Ailion.

With risks come rewards

Be aware that selling a two- to four-unit property down the road can be more difficult than trying to unload a single-family home.

“Investors are your primary market, but they’re typically willing to pay less than an owner-occupant,” says Ailion. “The gains in cash flow during operation of your rental are offset by a lower percentage gain on sale.”

In the long-term, however, multi-family property can prove a sound investment.

“Real estate is one of the best ways to invest your money,” Kislin says. “But you need to do your homework, make sure you’re well acquainted with the neighborhood, the building you’re purchasing, and future plans for surrounding buildings, and be willing to take risks.”

What are today’s mortgage rates?

Today’s mortgage rates for multi-unit property can be slightly higher than they are for single-family homes. For government-backed loans, however, there is no surcharge if you buy a duplex, triplex or four-plex.