There exists two kinds of multifamily properties:
- Residential properties: consist of two, three, or four units.
- Commercial properties: consist of five or more properties.
Actually there exists little difference between financing a multifamily residential property and its single-family counterpart.
Before you commit to buying a multifamily property, there are a couple of crucial questions you need to ask yourself to determine if purchasing this type of property is actually the right thing to do.
#1 What makes up a Multifamily Property?
It may sound obvious, but first you need to get a good grasp of the kind of investment honey pot you intend to dip your finger into.
Multifamily properties comprise two or more distinct units, each of which boasts a living space as well as a bathroom and kitchen. We have already mentioned the two types they come in.
#2 Why Buy One?
Purchasing a building that contains multiple units can double up as an investment-only whereby the owner lets out units to tenants, or can be used as the owner’s residence with some of the units earmarked as living space and others as rentals.
With affordable monthly payments and good rates, a multifamily property can be a money-spinning investment to supplement the owner’s other income sources.
#3 Is Financing Different for both Sets of Owners?
By different sets we mean owners who reside on their multifamily premises and those who have rented out the entire units. Financing is different, yes.
Investment property buyers not looking to stay ‘in-house’ need a larger down-payment to purchase the home – assuming the loan is of a conventional size. Moreover, the interest rates for these types of investment homes not occupied by the owner tend to be higher than the owner-occupied.
The reasoning behind this is that the property stands more risk if the owners are not present, and investors who accept increased risk escalate their fees and interest rates in return.
It’s not easy to obtain a non-owner occupied investment home that would ask for a colossal mortgage; not unless you would be working with a portfolio lender keen on such offerings. Buyers may also anticipate large required cash reserves, stringent credit requirements, not to mention more upfront fees to offset the risk to the lender.
#4 Can Rental Income be used to Qualify for a Multifamily Loan?
If a lender is ready to consider rental income as part of the loan’s qualifying income, the existing rental agreements in most cases need to be in hand prior to wrapping up the financing.
Vacant premises are a greater risk on the lender’s part because there is always the ‘what-if?’ the units are not filled.
#5 Are Loan Caps Higher for Multifamily as Compared to Single Family Properties?
While there is a conforming loan limit carried by conventional loans in most states, loan limits for multifamily properties escalate with the number of units in the building.
If you are thinking about purchasing a multifamily property, it would be wise to discuss your plans for the building with a loan officer, as well as your financing options. They will be able to answer depending on your individual case, and whether you’re likely to qualify for a loan on such a dwelling.