Multifamily homes: Make your house pay for itself

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There are many factors to evaluate when considering a multifamily home:

• Getting a higher residential mortgage on a 2-4 unit property might be easier based on the rental income generated. Additionally, the rental income from your 2-4 unit property also could cover or reduce your mortgage, and you’ll build home equity.
• Many lenders require applicants to demonstrate property management experience, prove that they have enough savings to cover several months of mortgage payments, and/or submit to tougher underwriting standards.
• Mortgage lenders consider any one-to-four unit property a primary residence as long as you intend to live in one of the units. This means you can apply for government loans that require applicants to live in the home.

Multifamily homes deliver great value

Two factors dominate today’s real estate market: shortages of available properties and the growing need for rentals. If that’s your situation, leverage it. Take advantage of competition for housing and consider multifamily homes when buying your primary residence.

The advantages

There are multiple benefits to doing this. Getting a higher residential mortgage on a 2-4 unit property might be easier based on the rental income generated. Combine the right loan with the right property lets you put as little a 3.5 percent down, even with a less-than-perfect credit score.

The rental income from your 2-4 unit property also could cover or reduce your mortgage and you’ll build home equity.

Moreover, you’ll have access to larger mortgage loan limits for these multi-unit buildings since loan maximums are higher than for single family homes.

The disadvantages

You know some of the benefits of multifamily housing, but you’ll want to carefully consider drawbacks. When this is your primary residence, you’re living in close proximity to your tenants. You’ll get to know each other intimately since there’s less privacy than a single family home.

You’re also sharing common spaces like any yards, decks, pools, parking and, perhaps, storage areas.

Tenants are your primary clients for this business, and they see renting as a business transaction. That means they make demands. For example, if a unit requires a repair, tenants will knock on your door—at midnight if necessary.

The costs

Your monthly costs — utilities, property taxes, mortgage payments and maintenance — are likely to be higher than those of a small single-family home.

In addition, you’ll want to set aside money to replace items as they wear out. You might be able to put off replacing your own dishwasher for a month or two, but not your tenants’.

And what happens when you have a vacancy or two? Your expenses go on even when your unit sits empty.

For this reason, many lenders require applicants to demonstrate property management experience, prove that they have enough savings to cover several months of mortgage payments, and/or submit to tougher underwriting standards.

Where should you buy your multifamily home?

Research markets carefully. Buy somewhere you’ll want to stay long-term, because the cost of buying, moving and selling takes a large bite out of your potential profit.

The tenants you’ll attract depends on the quality of the neighborhood, so look at school ranking and crime rates.

It’s easy online to research rents, vacancies and future development. Evaluate neighborhood stability so you’re sure you maintain ample rental revenue.

Look at the job market and local amenities. Buy a building that makes commutes to work and school easier. Research the market carefully so you buy in the right property.

How do you finance multifamily homes?

Mortgage lenders consider any one-to-four unit property a primary residence as long as you intend to live in one of the units. This means you can apply for government loans that require applicants to live in the home.

To be eligible for any government loans, you have to pass a CAIVRS check, which verifies that you are not on a database of people who have defaulted on government loans, such as student loans or back taxes.

Most lender guidelines require that you have previous landlord experience, property management or related experience to count your rental income when qualifying for a mortgage. You’ll also probably need to prove that you have cash reserves to cover your payments if your units go unrented for six months.

FHA and VA

With FHA programs, you can buy with as little as 3.5 percent dows, as long as your credit score is 580 or higher. Between 500 and 579, you’ll need ten percent down.

VA allows 100 percent financing. and allows up to four units. However, VA also has special guidelines for loans in which two or more VA-eligible veterans, all using their eligibility, can purchase multifamily property.

Under these rules, they can buy four family units (a four-plex, for instance), and one business unit, plus one additional unit for each veteran participating in the ownership (that’s six residential units plus an office for two vets).

Conventional (non-government) mortgages

Conforming lenders (Fannie Mae and Freddie Mac) require higher down payments — 15 percent for a duplex and 25 percent for three-to-four unit properties, if applicants choose fixed-rate loans.

Other programs focus on rental residential lending and may approve your loan based on the income-producing value of the property.

You don’t even have to live in the property under some programs. In that case, your own personal income is less a factor, as is your credit rating.

However, the property must create enough income to cover all of its costs, and your lender will require special legal entities to make sure the mortgage is paid from then rents.

What are today’s mortgage rates?

Current mortgage rates for multifamily properties can be slightly higher than those for single family homes. That’s because these homes are also income property, and this can add risk to the lender.

However, it can be much cheaper to buy a home when your tenants are helping to pay your mortgage.