Multi-Family Property - Good Investment?
What you need to know about Multi-Unit Properties
Along with all of the great opportunities all over New England to purchase single family residences, there are also huge opportunities to purchase multi-family properties.
These properties have many benefits, including favorable financing opportunities as well as income producing rental or in-law living potential. In this article we'll discuss the things you need to know about these properties if you're thinking about making a purchase.
Buying a Multi as a Primary Residence
According to the underwriting guidelines of both Fannie, Freddie and FHA, you are able to purchase a multiple unit property, with traditional home financing, provided you intend to live in one of the units as your primary residence.
Anything that is above four units falls into the category of what would be considered a commercial property, and would require an entirely different financing package.
Down payments for traditional investment properties, you plan on renting, start in the range of 20% to 25%.
If you intend to occupy one of the units in the multi-unit property the down-payment will be considerably less.
FHA Multi-family Program
3 Family Property (shown above)
FHA for instance will allow a down-payment of 3.5% for 1 - 4 family owner occupied properties, even a first time home buyer. It is common when purchasing a multi-family that reserves will be required. Reserves are cash available in the bank after closing to use in case of emergency. 1 and 2 unit properties do not require reserves while 3 and 4 unit properties will require at least 2 months of reserves. One month of reserves is equal to one full mortgage payment, including principle, interest, taxes and insurances aka PITI.
Other government programs such as USDA Rural Housing does not allow multi-family properties.
VA or Veterans Administration loans only allow the purchase of a multi-family property if the buyer has at least 1 year experience managing a multi-unit property in the past.
Mortgage rates on a FHA loan for this type of property will be exactly the same as a single family.
Conventional (Fannie and Freddie) will be slightly higher and they will require a larger down-payment dependent on credit history.
Income & Expense Calculations
If you are thinking that you would like to purchase a multi unit dwelling as an investment property, live in one unit, then used signed leases on the other(s) to act as income on a mortgage application, you have the right idea, but need to understand what is considered effective income.
To be able to use rental income on a mortgage application, you will need signed leases, or rental agreements if they are common for the state you're buying in.
You will also want to know that the underwriter won't be able to use 100% of the monthly rental income. Typically a FHA Underwriter will be able to use 85% of the rental income. The rents must also be common and acceptable for the area.
When calculating your potential monthly income and expenses, you will always want to err on the side of caution. Owning and managing rental property presents a myriad of risks to the landlord and to the lender.
A good rule of thumb would be to calculate your expenses carefully and then add 15%. You will want to factor in considerable amounts for vacancy, collection, repairs, advertising and apartment turn-over. These are common expenses that new landlords forget about.
There are significant tax benefits to owning a multi-family residence. You will most likely now have the ability to file a Schedule C in your tax returns. This will allow you to deduct certain business related items that you would not have otherwise. Please consult your tax professional for details.
Common Multi-family Markets
[caption id="attachment_1801" align="fltlft" width="300"] 2 Family Property[/caption]
Virtually every Boston suburb is loaded with multi's. Areas like Arlington, Belmont and Waltham are loaded with multi-family property.
Worcester, MA is known as the Triple Decker Capitol of the World.
Hartford, CT has a very high concentration of multi-families.
Providence, RI is known for it's multi's as well.
Other areas up and down the East Coast do have multi-unit properties but, they aren't as common as New England.
Multi-unit properties are great to consider when you are looking to subsidize a portion of your mortgage payment. Over time, you may consider buying a single family property to live in and rent all the units of your multi. This is fine as long as you truly intend to live in the property as a primary residence for a period of at least one year.
Multi-family properties are abundant throughout New England. If you have questions regarding financing a multi-unit property, please give us a call here at Poli Mortgage. We would be more than happy to answer your questions and let you know what your financing options are.
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