Multi-family homes are a fantastic option for homebuyers of all types, whether a first time buyer or a seasoned investor. These are properties with 2+ units; often known as 2-family, 3-family, and 4-family homes. There are many intricacies to purchasing a multi-family home, whether you are an investor or an owner occupant buyer. Purchasing a multi-family home is an excellent way to build wealth and create passive income. Purchasing a multi-family home does, however, come with a whole bunch of nuances that are worth noting!
Purchasing a multi-family home can be a great option for someone that is having an issue qualifying for the quality of home that they are seeking. The reason for this is because, as a buyer, your pre-approval amount will be greater on a multi-family home than a single family home. This is because when you are pre-approved, the bank will factor in rental income that can be earned on each additional unit for your income calculations. Thus, you are going to qualify more for a 2-family than you would a single family. You will also qualify for a higher purchase price on a 3-family than you would on a 2-family due to the additional unit, and so on. It is important to note, that mortgages for a 5-unit or greater are considered commercial and will have very different guidelines for qualification than your standard residential mortgage.
Purchasing a multi-family home is also a fantastic way to subsidize your mortgage. By finding a sound 2-family home, you could live in one unit and have a very low monthly payment on your mortgage after factoring in your rental income. 3-family homes are very frequently used by owner occupants to cover their entire mortgage payment and potentially even earn some extra income beyond the payment. 4-family homes naturally yield the greatest rental income of all of the residential multi-family options.
Purchasing a multi-family home can have many advantages, some of which we just mentioned above. Most people don’t typically think of their first purchase as being a multi-family home. However, it might be worth considering depending upon your goals. By purchasing a multi-family first, you will be able to utilize some of the great owner occupant loans for both purchases, rather than just one. These will allow you to put much less money down than if you purchased the multi-family second with an investor’s loan. If you purchase a single family home first, you will not be able to enjoy the benefit of using an owner occupant loan for your investment property. This will, of course, require living in the multi-family home for at least one year before purchasing your single family, but it is a very clever way to become a real estate investor with minimal out of pocket expense.
There are numerous different topics that are worth discussing when considering purchasing a multi-family home. Some of the other important things to discuss with your Realtor would include putting the title to the property in the name of a Limited Liability Company, as well as how to comply with Fair Housing Laws when seeking tenants. At ASJ Realty Group, our agents have the expertise to give you guidance from your very first pre-approval all the way to building your investment portfolio. A GREAT agent will not only guide you to finding the perfect investment property, but they will also coach you on how to make it a successful start (or addition) to your investment portfolio.
Thomas Cody, Realtor, C-REPS