Financing a Multi-Family Home: 9 Tips to Plan Ahead

Rental markets in many cities are booming. If you are a prospective investor who likes the idea of some real estate income, multi-family or rental income property can be a great investment.

However, getting financing for a multi-family property is often different from a personal residence single-family home or Jupiter condominium for a few different reasons. If rental property is something you plan on pursuing, knowing some of these tips might be helpful:

1. Live in one of the units

Investors purchasing rental properties purely as an investment typically need a larger down payment and pay higher interest than those who plan to live in their own homes. In general, lenders usually feel that homes where the owner is not living in the home have more risk of default than those living in the property.

Additionally, you can likely only use a VA loan or an FHA loan if you plan to live in the building. Typically, an owner-occupant using an FHA loan will only have to put down about 3.5%; an investor may need a down payment of about 25% or more.

2. Using the rental income to qualify for the loan

In some cases, mortgage lenders may be willing to count the potential rental income as income for paying back the loan. However, in most cases, there will usually need to be signed leases for the property to be able to be able to include the rent income in your income. Some lenders may also be willing to perform a market appraisal to determine how much rental income there will be from the property, though may not be willing to take the risk.

Needless to say, lenders like to see that there will be rental income to pay the mortgage so the potential of unrented units does not count as much as cash in hand.

3. Local loan financial assistance might be available

Some states, counties and/or cities may have programs available for people who purchase multiple family or rental units - especially those that may subsequently rent to low-income or disadvantaged tenants. They can provide assistance with the down payment or connect you with lenders that offer lower-cost loans.

Ask your mortgage lender about local programs or do research in your area to see what might be available. For instance, some areas have "Go Green" grants available that can help pay for energy-efficient furnaces and insulation.

4. Higher loan limits may be required

Multifamily units usually cost more than single-family homes, so you may have to seek a higher loan limit in order to purchase.

You, along with your real estate agent, should investigate the current market values of multi-family and rental properties in order to have enough of a loan value to have the option of different properties to purchase.

5. Estimate the rental income from the units

Many investors and lenders use the rule of thumb that rental income should be roughly double the monthly mortgage. This leaves enough monies, after paying the mortgage, for necessary maintenance and to cover your costs when there are vacancies.

6. Be realistic about repair costs

When purchasing rental or multi-family homes, it is sometimes difficult to find West Palm Beach properties that do not need any repairs at the time of purchase. Get estimates for any repairs that may need to be completed before renting the property. Because of the possibility of additional funds being needed, be sure and either add this to the financing of the property or have the cash on hand to pay for them.

7. Check the location of the property before purchase

Before buying a rental home or multi-family dwelling where you plan on having tenants, be sure they are allowed in the area. Many cities, local governments or HOAs may have limits on the number of rental properties within their complex or geographical area.

Ask your real estate agent for assistance and check to make sure you can rent the property before you purchase the property.

8. Property Managers are Sometimes Needed

It may seem unnecessary to have a property manager, though you may find that it is more comfortable for you to have someone else collecting the rent and dealing with the tenants and the contractors for necessary repairs.

Investigate the cost of a property manager even if you think you want to handle it all yourself. You may find that the cost per month is low enough to justify the expense.

9. Have a long-term rental investment plan

Many people start by purchasing a single investment property with an idea that they will continue to buy more and gradually build up a real estate portfolio. Before starting to buy rental homes and/or multi-family homes in Jupiter, consider creating a long-term goal or plan.

Do you want to have just one property? Or many? Consider the additional time and money more units may demand in your long-term planning goals.

Becoming a landlord and investor in rental properties is not a path for everyone. It takes good management and negotiation skills, as well as a great real estate agent at your side, to make it work. But, if you have the patience and skill, you might be able to make the current rental boom work for you!