Investing in multi-family homes the easy way
Perhaps the easiest way to move into investment property is to move into investment property. Buying a duplex, triplex or quad and living in one unit is one of the easiest forays into real estate. In the current market, rental ownership might give you the benefits of homeownership with the additional benefits of rental income all under the same mortgage.
Some advantages to buying a multi-family property and living in it include:
Building equity for the landlord (Oh wait, that’s you!)
Having multiple units inside one mortgage
Creating cash flow and living less expensively while tenant(s) pay the bills
Access to long-term financing
Finding the Great Deal
If you buy a property where no one wants to live or pay too much for the property you won’t reap the benefits, but if you do some homework, you might find a gem that can give you ongoing income stream. Most importantly, the property needs to be in an area YOU are comfortable living. Typically, that means you’ll be looking at investment properties in the mid- to higher price range or distressed properties in a great area that need fixing up.
To find a great deal, you need to educate yourself on the process. If you’ve never purchased any property before, don’t rely on what you see on television “Flip” shows. You need to find a real estate professional that knows the area you’re interested in, and knows both the rental market and the real estate market. It also helps to read some solid real estate investment books or take a class, but don’t fall for the “no money down investment schemes” out there. Real business decisions require research, a plan, real investment of time or money (usually both time and money) and great advice from a knowledgeable team.
Finding Financing
The tightened credit market doesn’t just apply to single-family homebuyers. The best possible financing comes from having a solid plan and borrowing from a position of strength. Debt-to-income ratios need to be 45 percent or less for a conventional loan, but can be slightly less for FHA borrows.
Ordinarily, federal mortgage insurance doesn’t cover investment properties except under specific conditions (five units or more) and only at 85%, so you’ll need to have at least 20% available as a down payment. In fact, if you put 25% down you might qualify for an even better deal with a lower interest rate. But, if you intend to live in the property you are eligible for either a FHA or VA (if you’re a qualified veteran) loan on the multi-unit property.
Ideally you want to select properties that is at least partially occupied. If not, you’ll have to qualify for the entire mortgage based on your current income. If you have a signed lease for any/all of the additional units the FHA lender may consider the rent(s) as part of your qualifying income. Additionally, the FHA requires higher cash reserves for a triplex or quad (not a duplex) so you’ll need to have 90 days worth of mortgage payments in the bank. Additionally, when utilizing an FHA loan, any co-signer must also occupy one of the units.
A final note on FHA loans is that the property has to meet occupancy-readiness standards unless you request an FHA Insured HUD 203(K) loan.
All loans, conventional or FHA, will have specified limits based on the number of units and the county it is located in.
Other Financing
Cities, counties and the state of Texas often have programs that may provide grants or other assistance for down payments and might even offer low-cost loans.
I can help you navigate your first investment in rental property, so call me when you’re ready and take advantage of my expertise. -JB
Investing in multi-family homes the easy way