Many home buyers wonder if they should consider applying for a multifamily mortgage to help defray the cost of home ownership. Having multiple units in a property you are buying can greatly lessen your monthly out of pocket costs. A multi-family property is defined as a two, three or a four unit property. 2-4 units allow borrowers to apply for a residential multifamily mortgage. On the other hand, 5+ units will require borrowers to apply for commercial mortgage financing. Furthermore, borrowers can also do 2-4 units as a commercial mortgage (stated income if desired) as long as the property is in a LLC.
Before jumping into a multi-family property, a home buyer must consider both the financial and lifestyle ramifications. Many inexperienced home buyers think that being a landlord means depositing a rent check. When a buyer becomes a landlord, he or she essentially takes over a small business. The asset of the business is the property, and the tenants are the customers. The landlord must maintain the physical asset, provide customer service to tenants, and hopefully earn a profit on the operations.
Mistakes Not to Make
Most multi-family home buyers make three financial mistakes when planning for a purchase. The first is to assign the maximum possible market rent as the rent that they will receive from their tenants. There is a direct correlation between rent prices in relation to competing apartments and the amount of turnover among tenants. In other words, the higher the rent, the more likely that a tenant will move within a short period of time. This is due to the basic laws of supply and demand.
Potential landlords also fail to make adequate provisions for rent losses due to vacancies and repair expenses on the rental units. If an apartment normally rents for $1,000 per month, most buyers will simply figure their monthly payment and subtract the $1,000. No apartment anywhere has ever stayed 100% rented forever. Even the normal process of tenant turnover will often cause the loss of one month’s rent. Prudent landlords should budget at least one month of vacancy per year in good rental markets, and two to three months of vacancy per year in softer markets.
Repair expenses are also vastly underestimated. If a new landlord can make most simple repairs, then costs should be limited to materials only. In contrast, a landlord who must hire out all repair work will quickly find bills mounting. Holiday, weekend, and midnight calls to plumbers for broken pipes can inflict major casualties on a property’s cash flow. Landlords must set aside a portion of rent revenues each month to prepare for these expenses.
Multifamily Mortgage Guidelines
When applying for a multifamily mortgage, borrowers will need to know a few underwriting guidelines to help them along. As said previously, 4 units and under falls underneath residential financing whereas 5 units and more requires a commercial mortgage. But if you plan on buying your 2-4 unit home under an LLC, then you will not be able to do a residential loan.
Furthermore, if you are applying for a multifamily mortgage as an investment property then you will need to show several months of reserves. Whereas if you are buying the property as a primary residence this will not be required.
Finally, there is a difference in down payments when applying for a multifamily mortgage. If you plan on living in the property, then you will qualify for Conventional or an FHA home loan. Both of which allow for as little as 3.5%-5% down. If you are buying the property as an investment, borrowers should be prepared to put as much as 25% down for a multifamily mortgage.
At Spartan Commercial Mortgage, we specialize in multifamily mortgage loans. Our pre-approval process is easy, and we will work with you every step of the way. Please call us today for a free consultation.
Thanks,
Michael Meyer
President Spartan Commercial Mortgage Services
mike@spartancommercialmortgage.com
(860) 876-0572