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How To Buy Multifamily Homes

How To Buy Multifamily Homes
Holly Johnson
Updated April 27, 2022
9 Min Read

Real estate can provide an excellent way to diversify your portfolio, as well as the chance to build streams of passive income and long-term wealth. However, there are many different types of real estate to consider, including commercial real estate, single family homes, and multi-family residential properties.

While there are good reasons to consider investing in any real estate niche, multifamily properties tend to be at the top of most real estate investors' wish lists. This is partly due to the fact these properties help boost income with multiple rents, but it's also because multi-family homes can share walls, a roof, and common space with other units. This often leads to lower operating costs overall.

What Is A Multifamily Property?

A multifamily property can take shape in many different forms such as apartment complexes, condo buildings, or duplexes. In some cases, a single family home is split into multiple units with one entrance, although multiple entrances are also common.

While an investor can purchase a multifamily property for investment purposes only, homes with multiple units are also popular among investors who want to live on-site. In this case, the property owner can live in one of the units, manage the other units at the same time, and have other renters pay for part or all of their living expenses.

How to Evaluate a Property

What is the best way to compare and evaluate residential properties with multiple units? There are quite a few factors to consider as you gauge the investment value of a multi-family home, yet the following details are the most important.

Location, Location, Location

As you search for multifamily properties to invest in, you'll want to consider the location first and foremost. After all, the goal of investing in real estate is being able to secure tenants that will ensure the property is profitable over time. To do that, you have to select a multifamily home that is located in a place other people want to live.

While there are no hard and fast formulas when it comes to finding the best physical locations to invest in, you should strive to find real estate investments that are located close to places people work, shop, or go to school. These ideal locations may look different in rural areas than they do in urban centers, but the same general rule applies. 

In the meantime, you can also look for properties that are near interstate highways popular for commuters, or near public transportation lines that take people into city centers for work. 

Units Amount and Types

Multifamily homes can be incredibly diverse, and you'll want to consider the type of property and its pros and cons before you buy. For example, multifamily properties with 5 or more units are considered to be commercial real estate, so you may have fewer loan options available to you. With that in mind, it can be smart to look for an investment that has four units or fewer.

Maybe you want to manage the property yourself and you want a maximum of two tenants at any given time. In that case, you would want to look for a property that has a few separate units at the maximum, such as a duplex.

If you're planning to live on-site, you'll also want to find an investment property that has attributes you personally like. For example, you can look for a home in an area you want to live in, as well as one with the number of bedrooms and amount of physical space you need.

Determine Potential Income

To find the income of any potential rental property, you'll need to know how much rent you're likely to bring in across all available units. Typically, landlords use websites like Rentometer.com or Craigslist to find average rents in various areas around the country. However, you can also check local rental listings in your area, as well as your local newspaper.

Figure Out the Total Costs

Once you have a general idea of rental rates in an area, you can compare that to the monthly mortgage cost for the property you want to buy. Just make sure you also factor in estimates for the costs of property taxes and insurance. If you are relying on a home loan that requires private mortgage insurance (PMI), you'll need to factor that into the monthly housing payment as well.

As an example, let's say that you plan to buy a multifamily home with a purchase price of $400,000, annual property taxes of $9,000, and annual landlord insurance expenses of $2,000. 

If you had $100,000 as a down payment and borrowed the remaining amount in a 30-year mortgage with an APR of 5%, the principal and interest of the mortgage would work out to $1,610 per month. When you add in 1/12 of the cost of annual property taxes ($750) and 1/12 of the annual cost of homeowners insurance for the property ($167), the total estimated monthly payment works out to $2,527.

Once you have an idea of rental income and mortgage costs, you should also factor in approximately 1% of the property value in costs for upgrades and repairs each year. If a home is worth $400,000, for example, you should plan to set aside $4,000 for potential expenses.

Research the Seller

You'll also want to have a general idea of who is selling the property and why they're selling it. After all, the current owner's situation and their reason for selling can play a role in the type of offer you should make.

Also note that properties owned by banks can be a better deal, although the process for purchasing bank-owned properties is different altogether. If an investor is selling a multifamily home, on the other hand, you'll likely need to offer the market price for the property to secure a deal.

Multifamily Home Loans Options

If you plan to buy a multifamily home, you'll need to understand all your financing options ahead of time. Not only do you need to know which types of home loans you can qualify for, but you'll want to understand the down payment requirements and credit requirements for each.

Fannie Mae and Freddie Mac Loans

Home loans from Fannie Mae and Freddie Mac, which are also called "agency loans," make up a large portion of the home loans for multifamily properties. These loans may let you borrow up to 75% or 80% of the property's current value, and you can apply for them with approved lenders. 

FHA Loan

FHA loans are available for multifamily properties with up to four units provided the investor actually wants to live within one of them. These loans are available with down payments as low as 3.5%, and they come with reasonable credit requirements and low closing costs

VA Loans

Eligible military members and veterans can also use their VA home loan benefit to buy a multifamily property with up to four units, although they do have to use the home as their primary residence to qualify. VA home loans don't have any down payment requirements and they don't charge private mortgage insurance (PMI), although an upfront funding fee is required instead.

Portfolio Loan

A portfolio loan is a nonconforming mortgage that can be used for multifamily properties with at least two units. These loans let investors finance anywhere from four to 10 units all at once, and they let investors borrow up to 97% of the current market value.

Short-term Financing

Short-term financing is a type of home loan that involves both hard money loans and bridge loans. This type of financing is meant to be short-term as investors renovate multifamily properties in poor condition with the goal of transitioning them to long-term financing.

How To Qualify For Multifamily Loan

As you prepare to invest in real estate of any kind, but especially in multifamily homes, you'll need to make sure you're financially prepared. Consider the main financial factors that will come into play, including the minimum requirements you'll need to meet for a mortgage.

Down Payment

One of the most important factors to keep in mind when preparing to invest in real estate is your down payment. After all, every type of home loan you can use for multifamily properties requires you to have one.

Where FHA loans for owner-occupied properties may require you to put as little as 3.5% of the purchase price down, other loans for multifamily properties can require a 25% down payment or more. 

Debt-To-Income Ratio (DTI)

If you're considering investing in real estate, you'll also want to keep your current debt-to-income ratio (DTI) in mind. This formula represents the amount of debt you have in relation to your gross income. While a DTI on the lower end shows you have additional income to cover expenses related to the property, a DTI that's too high can signal to lenders that you are at risk of overspending.

Generally speaking, you should strive to keep your DTI below 43% if you want to invest in any real estate, including multifamily homes. This means you would have no more than $4,300 in fixed monthly expenses (i.e. your housing payment, car payments, and other debts) if you have $10,000 in gross monthly income, or $2,150 in fixed monthly expenses if you have a gross monthly income of $5,000.

Good Credit Score

You'll also want to make sure your credit is in good shape if you hope to purchase a multifamily home through traditional means. In most cases, you'll need a credit score of at least 620 to qualify for a conventional home loan or a VA loan. However, you may be able to qualify for a FHA loan with a credit score as low as 580. 

How To Buy a Multifamily Home

If you are hoping to purchase a multifamily property with several units under one roof, you're certainly not alone. In fact, multifamily homes tend to be popular when they hit the market, so you can expect to have plenty of competition as a result. 

That said, having a basic understanding of where to find multifamily homes and how to purchase one can give you a leg up in the process.

Find A Multifamily Home

The first step involved in investing in multifamily homes is finding them in the first place. Fortunately, you can find multifamily properties using the same strategies you use to look for single family homes to invest in.

You can start looking for multifamily homes using your area's Multiple Listing Service, or MLS. According to the National Association of Realtors (NAR), each area's MLS is a "tool to help listing brokers find cooperative brokers working with buyers to help sell their clients' homes."

Beyond keeping an eye out for properties on your region's MLS, you can also get access to leads through:

  • Real estate websites for companies that operate in your area
  • Real estate auctions
  • Real estate professionals who may insider information on properties that will soon be for sale

Choose A Loan

As you look for a multifamily property that fits your criteria, you should also make plans to line up financing. This is true whether you plan to use a conventional loan for the property, or whether you plan to apply for a FHA loan or use your VA loan benefit.

Generally speaking, it helps to have a pre-approved loan offer in hand when you write an offer for the multifamily property you hope to buy. With that in mind, it's smart to speak with a lender and begin the loan process early on in your journey to buying a multifamily home.

Make An Offer

Once you find the property you want and have your financing lined up, you should work with your real estate agent to formulate an offer that has a high probability of being accepted. Your offer will include your pre approval letter for financing, the amount of money you would like to pay for the property, and the amount of earnest money you are willing to put down to secure the deal.

Provided the seller accepts your offer, you will likely complete an inspection of the property and negotiate for any needed repairs. You'll then close on the sale of the property, see the funds transferred from your mortgage company to the seller, get the keys to the home, and begin making payments on the mortgage.

Renovate And Get Ready For Your Tenants

Some multifamily units won't require any renovations right off the bat, whereas others might need serious upgrades before they are suitable for tenants. In some cases, you may need to pay for new flooring, new appliances, or upgrades to heating and air conditioning systems.

Note that properties in the best shape often fetch higher rents, so any money you invest in upgrades can be well worth it. At the very least, you'll want to make sure each unit in your property is clean and freshly painted with all of its components in working order.

Create A Management Plan

Do you plan to manage your rental units yourself? If not, do you hope to work with a property management company? Either way, you'll want to create a management plan that includes rules for the day-to-day management of your property as well as repairs and marketing to new tenants.

If you plan to rely on a management company to deal with tenants, marketing for new renters during vacancies, and day-to-day problems that arise, you'll typically need to budget anywhere from 8% to 15% of the monthly rental income for this type of help.

The Bottom Line

Investing in real estate comes with many financial benefits, and that's especially true if you invest in multifamily homes. After all, properties with more than one unit can boost your potential profits while reducing the number of vacancies you have. Not only that, but many multifamily homes are worth more to begin with, and they have the potential to increase in value even more over time as a result.

Still, you'll want to have all your ducks in a row before you start looking for properties to invest in. Typically, this means having your financing lined up ahead of time and having the cash on hand for your down payment and any needed repairs that arise.

With some research, planning, and preparation, you could be managing your first multifamily real estate investment in no time.

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