Available Financing Programs for Multifamily Properties (up to 4 units):

Conventional Financing:
- Downpayment to be at least 25% down.
-Loan rates will vary depending on whether you will be owner-occupying the property or using it strictly as an investment property.

FHA Financing: (see explanation below)
- Allowed for up to 4 units if property is owner-occupied.
- 3.5% downpaymen; the borrower must occupy 1 unit
- Mortgage insurance and other costs apply

Homepath:
- Allowed for Primary residence, Owner-Occupied and Non-owner occupied
- NO Mortgage insurance or Appraisal required
- Borrower must have 5% of their own funds into the transaction
- Only applies to Homepath approved properties

FNMA Homepath Flexible:
- Primary Residence Only
- Minimum 3% downpayment with additional FICO requirements
- NO Mortgage insurance or Appraisal required
- Borrower must have $500.00 of their own funds into the transaction and the rest can be gift for the min 3% down
- Only applies to Homepath approved properties

Using FHA to Buy Multi-Family Homes
There are numerous benefits to why a buyers should buy a multi-family. One of them being able to take advantage of great terms offered by FHA financing. The FHA program has always allowed buyers to use FHA financing to buy a multi-family as long as they owner occupy the property as their primary residence.

The basic concept is simple. The buyer buys a duplex, triplex or four-plex with the same 3.5% down payment requirement as a house. They rent out the other units and cover the difference from the mortgage payment as their share. If the homeowner decides many years later that living in a multi-family doesn’t fit their lifestyle, they either sell the property or move out and rent the unit they were living in.

Questions like: How long do you see yourself in this home? What do you plan on doing when you move out?, are great questions to ask yourself when considering a purchase. If you are like most, buyers do not see themselves living or owning a certain property forever. With prices and mortgage rates so low, many of them plan on renting the property when they’re ready to buy their next place.

Statistically multi-family properties have a much better CAP Rate (capitalization rate), which is a fancy term for how profitable a rental property is compared to the price you pay for it. If these buyers don’t plan on keeping the property anyways, why not buy a property that will make more money?
Here are some bullet points:

- The down payment required is the same as a Single Family Residence (house), which is 3.5%. On 3-unit and 4-unit purchases, you must calcualte the maximum loan amount by making sure the property rent rates can sustain the mortgage payments if the owner moves out (see more details below)
- FHA loan limits for multi-family are higher than for standard 1-unit homes
- Rates are the same as a FHA loan for a Single Family Residence

Let’s paint a perfect picture. Let’s suppose a young college student, Johnny, is considering buying his first home. Johnny’s parents want to co-sign for the purchase. Johnny knows he can’t afford a house by himself, so he looks at condos and townhomes for sale.

However, Johnny can’t commit to buying anything because he doesn’t want to live there forever. His real estate broker tells him to make sure he buys a FHA warrantable condo and that his association will likely have restrictions if he chooses to rent the condo out in the future.

Johnny’s parents suggest looking at a multi-family. Johnny finds a great four-plex by his school. The price is much more, but after doing some research Johnny calculates he’ll be paying less than any of the condos he’s looked at due to the rental income he’ll get from the other 3 units. If and when Johnny graduates from school, he knows he can either put the four-plex up for sale or rent out the last unit he previously occupied, making even more money than he did when he lived there.

When purchasing a three-unit (triplex) or four-unit (fourplex), the maximum loan amount is calculated by both the maximum amount set by HUD (U.S. Department of Housing and Urban Development) AND the max loan amount where the payment doesn’t exceed the estimated rental income for all units combined. The appraiser is required to do a rent-schedule on the appraisal to determine the average market rent rates for each unit and the average vacancy. The vacancy rate is 15% for most areas. You can see this rate HERE.

Here is an example:

Let’s suppose you have a four-plex where the rent schedule shows each unit should demand $1,000 a month. The average vacancy rate is 10%, which means we should expect the $1,000 a month per unit 90% of the time.

four units * $1,000 a month = $4,000

$4,000 * 90% occupancy rate =$3,600 estimated rental income for all units

In this scenario, the mortgage payment including all housing expenses (Mortgage payment with taxes, insurance, mortgage insurance and HOA dues) must be at $3,600 a month or less.

Sounds great, right? Of course, you’ll want to prepare properly before diving in. Being a landlord is a job. Here are a few pointers for the novice landlord:

Find out the market rent for your area and charge that amount. Renters who are willing to pay way above the market price should be a red flag. That’s often a sign of bad rental history. However, you also want to make sure you don’t leave money on the table.
Do credit and background checks on your tenants. There are numerous services you can easily setup an account with that will collect a renter’s background and credit for a small cost. You can even setup the account so these reports can be charged to a credit card, which the renters can pay.
Keep a slush fund for rainy days. You’re probably going to save a lot of money for your living costs by buying a multi-family. Try to save most of it to cover the cost of unexpected repairs.
Learn the laws and steps to evict clients. Hopefully you’ll never need this, but if you do have a renter that has to go, you should know how to do it.
Be properly insured. Remember, every renter can sue. Having the proper amount of coverage is vital to protecting your assets.
Sounds like too much work? You can always hire a property management company to do most of the chores listed above. They take a share of your profit and handle your service and maintenance duties including collecting rent payments and maintenance calls in case one of your renters toilet breaks or they have a leaky faucet.

For additional financing information contact:
Zack Duncan (265104)
CobaltMortgage | Mortgage Advisor
5005 SW Meadows Road, Suite 140
Lake Oswego, OR 97035
Direct: (503) 906-2407
zack.duncan@cobaltmortgage.com | www.cobaltmortgage.com

For additional info on property management contact:
Doug Cross
Principal Broker / Owner
Paragon Equity Partners
503-512-5137
Or, Click HERE for details