If you’re thinking about purchasing a home, you may be planning to buy a traditional, single-family property. And while any home purchase is a sound investment, you might want to consider the particular benefits of buying a multi-family property instead.
Buying a multi-unit property might mean that you’ll have living space for in-laws or extended family all under one roof but with the independence of separate living space. Or it could mean added income from tenants. And the good news is that there are some excellent financing programs geared specifically for multi-family residences.
Traditional home financing is available for multi-family properties of up to four units – properties containing more than four units fall into the realm of commercial properties and have different financing guidelines – provided that one of the units will be used as your primary residence. There are several different programs for which you might qualify:
•FHA (Federal Housing Administration) loans for multi-family properties carry a down payment requirement of 3.5% for properties containing one, two, three or four units. These loans are available even if you are a first-time home buyer. Properties containing three or four units also carry the requirement that the buyer have at least two months of cash reserves on hand in order to continue making monthly mortgage payments in the face of an unforeseen event. Mortgage rates for multi-family FHA loans are the same as those for single-family residences.
•VA (Veterans Administration) loans are also available for multi-unit properties, but only if the home buyer has at least a year of prior experience managing a multi-unit property.
•Conventional loans for multi-family properties carry slightly higher rates and may require a larger down payment than FHA loans; rates are based on credit history.
It’s important to remember that if you wish to buy a multi-family property, you will have to calculate what your income and expenses will be. When applying for a mortgage on a multi-unit property, you may use signed rental agreements to prove rental income. However, an FHA mortgage underwriter will likely consider only 85% of that rental income when assessing your financial picture. You will also want to make sure that the rent you are charging is common for the area in which the property is located.
When calculating your expenses, remember to factor in the risks inherent to being a landlord. You must plan for property turnover and vacancies, repair costs, advertising, and collection of rent from your tenants. It’s a good idea to add at least 15% to your expected expenses when calculating what you will need to comfortably manage a multi-unit property.
If a multi-family property seems like the right investment for you, talk to your loan officer about the loan options for which you may qualify. He or she can help you weigh the benefits and risks of taking on such an investment.