Many investors are realizing the advantages of having a multi family investment property. Now if you’re a beginner real estate investor and want to get in on the action, you might have some questions about the issue most others face with this strategy- financing a multi family property. Don’t worry, we’ve got you covered; you’ll be finding and buying multi family homes for sale in no time.
Financing a Multi Family Property: Duplex, Multi Family, or Commercial?
Before we can get into your multi family financing options, you need to first determine what category you’re interested in. Financing rental properties can differ depending on whether it’s a two-unit property or an apartment.
As a beginner, this is a crucial first step because it’ll make your investment property search much easier once you know what to look for. Here are the basic options:
- Duplex: a two-unit building
- Multi family: a triplex or fourplex; a building with three or four residential units
- Commercial: a building with more than four units
If you’re a beginner real estate investor interested in buying an investment property with multiple units, we recommend the first two options. This is because financing a multi family property that has four units or less is simpler; these income properties are typically financed using the same residential mortgage loans as single family homes.
A commercial real estate property, however, requires a commercial mortgage lender and these multi family loans usually have a more thorough and stringent qualification process.
Buying an Income Property with Multi Family Loans
Financing a multi family property is traditionally done by getting a loan from a bank- nothing new here. It’s what some consider to be an easy and low-risk option when you don’t have enough personal funds for financing a multi family property yourself. There are three options to choose from.
Owner-Occupant Real Estate Investment Loans
- FHA Loans: The Federal Housing Administration offers loans to buyers with less stringent qualifications and at lower investment property mortgage rates. The best part about an FHA loan is the smaller down payment (only 3.5 percent down which is significantly lower than conventional loans).
- VA Loans: If you or your spouse is a current or former member of a US military branch, this one is for you. Financing a multi family property as a veteran is made easy with Veterans Affairs loans. These loans never require mortgage insurance, are not subject to a minimum credit requirement, and offer lower closing costs. Qualifying for this loan is a great option for veterans wondering how to buy a multi family home with no money down. So if you’re a veteran, make sure to take advantage of this option.
These first two loans fall into the owner-occupant category. This means that you can only apply for these loans if you’re living in one of the units of your multi family property.
Investor-Only Real Estate Investment Loans
- Conventional Loans: If you can’t apply for the aforementioned loans, conventional loans are your only option. Conventional lenders do require a larger down payment and have a bigger borrower check-list. When applying, the lender will look at your credit score, income, debts, credit/payment history, and other financial assets real estate investors might have.
Knowing your credit score is a critical part of financing a multi family property. Essentially, this number is a statistical method for lenders to determine the probability of borrowers paying back the money. Real estate investors want to have good credit scores because this will help them get better loan terms and mortgage rates. The most popular scoring model is FICO, with scores ranging from 300-850:
- Bad Credit: 300-600
- Poor Credit: 600-649
- Fair Credit: 650-699
- Good Credit: 700-749
- Excellent Credit: 750-850
Once you know where you fall, it’ll be easier to negotiate appropriate terms for your loan. Keep in mind that the maximum loan amount does differ when financing a multi family property depending on how big the property is. A duplex has a limit of $620,200. A triplex has a limit of $749,650, and a four-unit building caps off at $931,600.
The higher your down payment, the lower your monthly mortgage payments will be. Typically, a duplex requires 20 percent down, and a multi family (3 or 4 units) requires 25 percent down.
Financing a Multi Family Property in Other Ways
There are a couple of other ways to go about financing a multi family property.
Use Your Rental Income
This isn’t a 100 percent guarantee, but real estate investors may be able to use their rental income to qualify for a loan. Now you might not find this offer from all lenders, but certain ones do agree to this. How does it work?
Mortgage lenders associate an extra level of risk when it comes to financing real estate investments because this isn’t someone buying their first home, it’s a business transaction. And so, they’re hesitant to offer loans which are higher than the borrower’s income. If your current income isn’t large enough for the loan you’re requesting, lenders might not approve your request. However, if you have rental income, you may be able to take out a bigger loan.
Let’s say you’re in the process of financing a multi family property which already has tenants with signed leases. These leases are what can be used as your extra rental income to qualify for the loan.
Mortgage lenders will almost always require lease agreements if you choose this method because they need some type of reassurance that you’ll have the cash flow to cover the monthly payments. If you have a specific mortgage lender in mind, contact them and check out your options.
If it comes down to it, getting a loan from the seller of the multi family home could also be an option. Financing a multi family property this way shouldn’t be your go-to option as interest rates can be higher and you might not always be able to rely on the seller.
Advantages of seller financing the multi family property do exist though. When the seller is your lender, credit score is less important, and there aren’t as many contract requirements to check off.
Whatever method you choose for financing a multi family property, always make sure you’ve done your research. Don’t settle on the first deal you find; weigh the pros and cons of each option for your personal case.
To make sure you’re getting a good deal on mortgage rates, use Mashvisor’s multi family investment calculator. Equipped with a mortgage calculator, our tool accounts for all expenses to give you a true reflection of your investment’s return.
Do you have questions about Mashvisor? Read our FAQs and learn about our tools.