Buying a Multifamily Home: A Beginner’s Guide
Buying a multifamily home, such as a duplex, is a popular way to get started in real estate investing. Multifamily homes help you earn a steady cash flow from multiple rental units and benefit from potential price appreciation. The process involves several steps, including deciding how you’ll finance and manage the property.
This guide will cover what you should know about buying a multifamily home, along with the mortgage options, loan requirements, benefits and risks to consider.
What is a multifamily home?
A multifamily home is any residential property where multiple families can live, including housing types like duplexes and apartment buildings. Multifamily properties typically have at least two or more separate housing units and share common areas such as hallways, stairwells and outdoor spaces.
Although some consumers seek multifamily homes to create multigenerational housing for their extended family, the extra units can also be rented to the general public. Many aspiring real estate investors are drawn to multifamily homes for the rental income they generate and their appreciation potential. These properties can be managed by the owner, a property management company or a homeowners association (HOA).
Investing in a single-family home differs from investing in a multifamily property in several key ways.
Single-family home: Since a single-family home is designed for one family to live in, it typically has lower upfront and ongoing costs, including a smaller down payment requirement and reduced property management expenses. Additionally, single-family homes tend to have less tenant turnover and lower maintenance and utility costs.
Multifamily property: Buying a multifamily home typically involves higher initial and ongoing costs. However, it offers more diversification than a single-family home, since you can rent out multiple units and have greater income potential. There’s also reduced risk because you’re not reliant on a single tenant for your rental income.
Multifamily home examples
Multifamily homes are generally defined as any property with more than one housing unit. Here are examples of the different types of multifamily properties:
| House type | Description |
|---|---|
| Duplex/triplex/quadruplex | A single structure with multiple units, each with its own entrance. The units can be side by side or on top of one another. |
| Townhouse | A building that has at least two stories and at least two units joined by common walls, located in a complex of such dwellings. |
| Conventional apartments | A building consisting of several units that are built above and below each other. |
| Mixed-use | A building that is used for various purposes, such as residential, commercial and retail. |
One smart way to create more space for extended family members or generate rental income — without having to deal with multifamily properties or loans — is to add an accessory dwelling unit (ADU) to your single-family home. An ADU is a fully independent living unit (typically an “in-law” type apartment or stand-alone structure) on the same lot as a single-family home. Since it doesn’t change the home’s designation — it’s still a single-family home, even with the ADU in place — this option allows you to remain eligible for single-family home loan programs.
6 steps to buying a multifamily property
Navigating the purchase of a multifamily home can be intimidating, especially for beginners. Here are some steps to help the process go smoothly:
- Determine how much you can afford. Take an honest look at your financial situation, including your income, expenses and current savings, to determine the mortgage payment you can afford. Consider factors like your down payment, closing costs and necessary renovation expenses. You’ll also want to factor in your potential rental earnings.
- Choose a loan type and lender. Loan options for multifamily properties include conventional, FHA, VA and commercial loans. Once you decide on a loan type, apply for mortgage preapproval. It’s a good idea to compare several mortgage lenders since terms and rates can vary by company.
- Shop for a home. Once you know the type of multifamily home you’re looking to buy (such as a condo or duplex), use online tools like the MLS to explore properties in your area. A real estate agent can assist in finding suitable options and offer valuable guidance throughout the process.
- Fill out a mortgage application. At this stage, you’ll need to provide the lender with documents to verify your income, employment status, credit history and savings. Once you submit the application, the lender has three business days to provide you with a loan estimate, which details your quoted mortgage rate, monthly payment, closing costs and other important information about your loan.
- Make an offer and close the deal. Once you find a house you want to buy, it’s time to submit an offer. Having a real estate agent is beneficial for negotiations. After the seller accepts your offer, you move into the closing process, which involves getting an appraisal and inspection and paying closing costs.
- Decide how you’ll manage the property. Will you manage it yourself or hire a property management company? No matter which option you choose, it’s crucial to set aside funds for both routine maintenance and unexpected home repairs.
Multifamily home loan requirements
Here are some of the key requirements for the main types of multifamily home loans:
| Mortgage type | Maximum number of units | Owner required to live at the property? | Minimum credit score | Minimum down payment | Maximum DTI
debt-to-income ratio
|
|---|---|---|---|---|---|
| Fannie Mae investment property loan | Four | No | Varies by lender (but commonly 680) | 25% | 45% |
| Freddie Mac investment property loan | Four | No | Varies by lender | 15% to 25% | Not listed |
| Fannie Mae loan (HomeReady®) | Four | Yes | Varies by lender | 3% to 5% | 36% to 45% |
| Freddie Mac (HomePossible®) | Four | Yes | 660 to 700 | 5% | 45% |
| FHA loan | Four | Yes | 500 | 3.5% | Varies by lender |
| VA loan | Seven | Yes | Varies by lender (but traditionally 620) | 0% | Varies by lender |
Using rental income to qualify
Being allowed to use future rental income to qualify for a loan is a major perk, especially for those working with a limited cash flow. It means that lenders will add a portion of your future rental income to your existing income when they qualify you for a loan.
Here’s a breakdown of how the main loan types will count your future rental income:
- Conventional loans will calculate your future rental income and add at least 75% of that amount to your income when evaluating your loan qualification information. If the home hasn’t been rented recently, don’t worry — you can use estimated rental figures.
- FHA loans will count 75% of future rental income as estimated through an appraisal or actual rental history, whichever is lower.
- VA loans will count 75% of future rental income, but you’ll need to prove that you have experience renting properties or are otherwise likely to succeed as a landlord.
Future rental property income can make or break your ability to qualify for a loan if your debt-to-income (DTI) ratio is near the cutoff.
For example, imagine that you want to buy a duplex with a conventional loan and can afford a $2,000 monthly payment. You plan to live in one unit and rent the other for $1,300 a month. Your lender would likely allow you to count $975 — 75% of $1,300 — toward your monthly income when calculating your DTI ratio. Now, instead of $2,000 on the “debt” side of the ratio, you’ll only have $1,025.
Should you buy a multifamily home?
The advantages of multifamily investing include:
- Rental income. The steady cash flow from renting out a multifamily property can help you pay off debt, build equity in the property, invest in the stock market or start a business. This is also one way you can house hack.
- Risk diversification. Multifamily homes have multiple units and, therefore, separate income sources — so if one tenant moves out, you can still receive income from the other tenants.
- Tax benefits. Owning a multifamily home allows you to write off your mortgage interest and the cost of repairs, maintenance and advertising as business expenses.
The disadvantages of multifamily investing include:
- Higher upfront costs. A multifamily property might have a higher price tag than a single-family home. This can translate to a larger down payment, a higher tax bill and pricier homeowners insurance, especially if you need a commercial loan.
- Property management needs. Since you’re dealing with multiple tenants, property management can be complex. If you manage it yourself, you could get calls from tenants day or night. If you hire a property management company, you’ll need to factor that cost into your budget.
- You may need cash reserves. Depending on the type of loan you’re getting, you may need to have a certain amount of cash reserves on hand, typically calculated as a number of months’ worth of mortgage payments.
Frequently asked questions
The “1% rule” states that if a property rents for at least 1% of its purchase price per month, the rent will likely cover the mortgage payments. That means the owner will at least break even, which makes the venture more likely to succeed.
Yes, a first-time homebuyer can buy a multifamily home, and this path is especially reachable with an FHA or VA loan because they have relatively low credit score and down payment requirements.
It depends on your loan type and whether you’ll live in the property:
- FHA loan (owner-occupied): As little as 3.5% down
- Conventional loan (owner-occupied): As little as 5% down
- Conventional loan (investment/non-occupied): 25% down
You should also budget for closing costs (2% to 5% of the loan amount) and cash reserves.
And remember: lenders can count up to 75% of projected rental income toward your qualification, which can meaningfully reduce how much income you need to show.
If you’re short on cash for a down payment, consider buying a multifamily home with funds from a cash-out refinance, home equity loan or hard money lender. Other options include finding a partner or co-borrower who is willing to front the cash, or waiting to buy until you save up the money. If you’re a military borrower, you can also use a VA loan and put zero down as long as you have full entitlement.
Yes, you’ll need cash reserves equivalent to three months’ worth of PITI payments if you’re buying a property with three or four units using an FHA loan.
It depends on your needs and goals. Single-family homes are generally easier to manage but may offer less income potential. Multifamily properties, while more complex to manage, can generate higher income since they have multiple rental units.
Buying a multifamily property can be a good investment for people seeking consistent cash flow and potential price appreciation. However, like any investment, it’s important to weigh the benefits and risks to determine whether it’s the right fit for you.
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