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The Benefits Of Buying A Multifamily Property

7-Minute Read
Published on November 1, 2021
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Whether you’re in the market for a new home for your family or looking to invest in real estate, buying a multifamily property could be the answer to your housing and financial needs. We’ll discuss some of the benefits of multifamily and how you can get started building a winning portfolio.  

What Is A Multifamily Property?

A multifamily home is a building that houses separate units where more than one family can reside. A multifamily home will have a designated kitchen and bathroom for each unit. Each unit will likely have a separate entrance, separate utility shut-off valves and utility meters.

Some examples of multifamily home types could be a duplex, townhome, condo or small apartment. The biggest distinguishing factor in multifamily properties is each has their own legal address. If you rented your finished basement to a friend and your family resides upstairs but you share a kitchen and front door, this would not be considered a multifamily property.

It is important to know the distinction between a multifamily home and commercial property. Properties with five or more units are considered commercial real estate. Commercial loans are different and have their own qualifying criteria and approval process that isn’t as user friendly as applying for a residential loan. Multifamily properties are often referred to as investment or rental property and can be purchased with a residential loan.

Rocket Mortgage® offers residential loans for owner-occupied properties as well as those purchased strictly as investment property, but does not offer commercial mortgages. 

It Has Four Units Or Less

Fannie Mae, Freddie Mac, and the FHA all define single-family homes as properties with four units or less. This is the type of loan we’re discussing in this article. 

At Least 51% Of The Building Is Residential In Nature

Single-family home loans may also be available for buildings with commercial space as well as residential space, as long as the building is at least 51% residential in nature. 

Why Buy A Multifamily Property?

Multifamily units are in high demand among real estate investors. It takes a lot of time and effort to build a winning portfolio. Investors like that a single transaction could add up to four additional units to their portfolio with minimal effort.

Multifamily homes are great for beginner investors because they can acquire a property with up to four separate units and start building home equity fast. A popular investment strategy many new investors take advantage of is living in one of their units while collecting rent on the others. The investor enjoys both the benefits of homeownership and real estate investing. 

Cash Flow

In a multifamily property each unit is paying into the owner’s mortgage, as opposed to a single-family home where the owner is solely responsible for the monthly payment.

For example, Anna and Chris are a young couple looking for a new home. They fell in love with a single-family home and a duplex. Both homes are $250,000 and in great locations.

If they choose the duplex, their monthly mortgage expense after their tenant has paid rent would be just $600 a month.

If they choose the single-family home, their monthly mortgage payment would be $2,000. They could save $1,400 per month if they choose the duplex. 

Rental Income Counts Toward Mortgage Requirements

For those who are self-employed or experience seasonal or sporadic income, rental income that you will potentially earn from the property can be considered income when you’re applying for the mortgage to purchase the home. This additional, steady income could help you qualify for a conforming loan with a better interest rate. 

Gain Property Management Experience

Owning a multifamily home is a great hands-on experience for budding investors or property managers. Managing a few units at a time will give you practical hands-on experience that will come in handy when you’re ready to grow your portfolio.

You will need to provide a lease to your tenants that complies with local and state guidelines, you’ll need to collect rents and process requests to maintain the property. Through this experience you will learn your strengths and weaknesses when it comes to real estate investing and property management.

Build Wealth

Investment properties build equity pretty quickly. The down payment for a multifamily property can be substantial and the additional rental income being paid monthly helps grow the home’s equity fast. You can then access that home equity with a cash-out refinance to help renovate the property, make necessary repairs or even purchase more investment properties.

The flexibility and additional income that multiunit properties provide are a great for those new to real estate investing.

Tax Benefits

There are tremendous tax benefits to real estate investment. Expenses like property tax, insurance, mortgage interest, repairs and improvements, advertising your property for lease and your property management costs can be deducted.

In addition to those standard deductions, your property might qualify for additional tax benefits of depreciating rental properties. This is done by convincing the IRS that the property in question has a determinable useful life. This deduction is meant to offset the cost of maintenance on a property over time. So if you plan to hold your investments long term, it may be worth exploring property depreciation with your financial advisor.

If you plan to be an active investor with multiple properties in your portfolio, you should talk to your tax advisor about the ins and outs of 1031 exchanges. A 1031 exchange allows you to sell one investment or business and buy another without incurring capital gains taxes as long as the exchange is completed according to IRS rules and the new property is of the same nature and character as the one being sold.

A 1031 exchange is a deferment, not a credit or reduction. Taxes may not have to be paid at the time of sale, but they will need to be paid eventually.

You can see there are very specific guidelines for a 1031 exchange, so you’ll want to speak with a professional financial or tax advisor to cover all your bases when planning your purchase. 

Hedge Against Other Investments

Real estate values are a bit steadier than investments like stocks. Inflation causes the value of stocks to drop but the value of a multifamily property will likely hold steady and in many cases increase in value. The rental property business can’t be outsourced and there is always a need for housing.

For Owner-Occupiers, Reduced Or Free Rent

Multifamily property owners can occupy their investment property and offset their living costs with the rent they charge tenants. This is called house hacking. Remember our friends Anna and Chris from our earlier example? By choosing a duplex and renting the other unit, they’re able to cover a significant portion of the mortgage while building equity in their home with someone else’s money. 

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What Are The Lender Requirements For Rental Properties?

There are quite a few types of home loans to choose from when you’re ready to purchase your multifamily property. Each has their own unique features and benefits. We’ll discuss some of them below.

Conventional Loans

To qualify for a conventional or conforming loan, you’ll need to have the following:

Credit score: A minimum credit score of 620.

DTI: Must be below 50%.

Conventional loan down payments for a multifamily property vary depending on the number of units and whether it will be the owner’s primary residence. 

  • Primary residence: If you plan to live in one of the units of your property, you’ll need to put down a minimum of 15% of the purchase price as down payment. 
  • Three or four units: If you plan to live in the home and there are three to four units, the minimum down payment is 20% of the sale price. 
  • Investment: If you don’t live in any of the units and the property is strictly an investment, the minimum down payment is 25% of the sale price. 

 

Jumbo Loans

If you don’t qualify for a conforming loan, you can explore a nonconforming mortgage, like a jumbo loan. A jumbo loan is a mortgage that is in an amount above conventional conforming loan limits.

You’ll need the following to qualify:

Credit score: A minimum credit score of at least 680.

DTI: Must be below 45%.

Not all lenders offer jumbo loan options for a second home or investment property. If they do, their requirements could be higher based on your loan purpose and the property type. Anticipate a minimum down payment of 15% of the loan amount.

The Jumbo Smart loan from Rocket Mortgage is great for primary residence and rental properties. A Jumbo Smart loan allows investors to borrow up to $2 million for an investment property. 

FHA Loans

If you don’t have access to funds for a large down payment, you can purchase up to a four-unit property with an FHA loan. You’ll need the following to qualify:

Credit score: A minimum credit score of 580.

DTI: Must be below 45%.

Unlike a conventional loan, the minimum down payment for an FHA loan is 3.5% regardless of how many units are in the home. We need to point out that you must reside in the property in order to qualify for an FHA loan and plan to live there at least a year.

You should also be aware that if you make a down payment of less than 10%, you’ll pay mortgage insurance premiums (MIP) for the life of the loan. If your down payment is more than 10%, you only have to pay MIP for 11 years. 

VA Loans

If you’re a qualifying veteran, a VA loan is a great way to start building a real estate portfolio. You’ll need the following to qualify:

Credit score: The VA does not have a set minimum credit score requirement, but most lenders will have their own requirements. Rocket Mortgage® requires a minimum credit score of 580 for VA loans. 

DTI: Must be below 41%.

Active-duty service members, reservists, veterans and surviving spouses of those who passed in service or as a result of a service-connected disability can apply for a VA loan. You will need to meet the standard VA service time requirements and obtain a Certificate of Eligibility. If approved, you can purchase a primary home with up to four units with no down payment. You may also be able to afford a more expensive home through a VA jumbo loan.

Be prepared to pay a one-time funding fee. For a first-time VA borrower, the funding fee is 2.3% of the loan amount. If you’re a disabled veteran or qualifying surviving spouse, you may be exempt from this fee. 

Requirements At A Glance

Type Of Mortgage

Credit Score Required

Down Payment

Owner Occupancy Required (Y/N)

DTI

Number of Units

2

3

4

2

3

4

2

3

4

2

3

4

Conventional

620

620

620

15%

20%

20%

N

N

N

Below 50%

Below 50%

Below 50%

FHA 

580

580

580

3.50%

3.50%

3.50%

Y

Y

Y

Below 45%

Below 45%

Below 45%

VA

NA

NA

NA

$0

$0

$0

Y

Y

Y

Below 41%

Below 41%

Below 41%

Jumbo

680

680

680

15%

15%

15%

Y

Y

Y

Below 45%

Below 45%

Below 45%

The Bottom Line: Buying A Multifamily Property Can Be The First Step Toward Great Future Wealth

Building a successful real estate portfolio is no small task. Purchasing a multifamily property is an excellent way to test the waters and see if real estate investment is right for you. Whether you plan to live in your investment property or manage it, you’ll need a good network of support. Be sure to connect with experienced professionals to advise you along the way.

Read on to learn more about buying your first investment property.

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Carla Ayers

Carla is a freelance writer and Realtor® with a background in marketing, communications and property management. She attended Eastern Michigan University where she received a Bachelors in Arts Marketing and a Masters in Integrated Marketing & Communications.