Ask any real estate investor who has been around for a while how they got started investing in real estate and it’s very likely tell you it was quite by accident but it all started when they bought a multifamily property. Whether it’s a duplex or a 2-4 unit property, buying such a property can provide a monthly cash flow as well as contributing to your financial bottom line over time through appreciation. To get the best deal when financing a multifamily home, you’re likely looking at a conventional home loan underwritten using guidelines set by Fannie Mae or Freddie Mac.
Let’s consider first a duplex. You’re wondering whether or not it would be wise to occupy one of the units and rent out another and then your loan officer tells you the down payment requirements and interest rates will be higher if you don’t. So you run a few numbers with your loan officer and get an idea on interest rates and fees.
If you do intend to occupy one side of the duplex you can use an FHA loan which requires only a 3.5% down payment, just as what is required for a single family home. A conventional loan asks for at least 15% down for an owner occupied duplex purchase.
Let’s say that you want to put down 20% of the sales price on a $200,000 home. That’s a $40,000 down payment and a $160,000 loan amount. At 4.00% on a 30 year fixed rate, the principal and interest payment is $763 per month. If the rent from the other side is $1,000 per month, you’re taking home $237 each and every month. Not only is this more than enough for your principal and interest payment but enough to take care of property taxes, insurance and maintenance costs.
If you want to purchase a 2-4 unit property, FHA asks for a 5.0% down payment while conventional loans ask for a 25% down payment. Remember that on FHA loans there will always be an additional mortgage insurance premium payment each month. If you do not intend to occupy any of the units, FHA loans won’t work and you can expect to put at least 25% down.
One final note, conventional loans do not allow you to use the rental income to help qualify if this is your first purchase. However, any future investment property you buy can use the rental income to help qualify as long as you’ve been a “landlord” for at least two years.