Q&A: Multi-Unit Property Financing

“Have you considered widening your home search to include multi-unit properties?” 

So you’re wondering how to buy a rental property? You’re not alone! There are an unprecedented number of first-time buyers looking to become their own landlords right now. But not exactly the surplus of starter homes to make it happen. So, maybe, they would be willing to become someone else’s landlord as well? Whether you are one of those many first-time buyers or a current owner looking to up your homeownership game, we hope you find this little Q&A on financing multi-unit properties helpful. 

How much do I need to put down on a rental property? 

You can purchase a two-unit property with just 15% down. For three and four units, Freddie Mac requires 20% and Fannie Mae requires 25%. The buyer will also need six months of reserves in the bank. So consider this: a buyer who has saved up the 20% down payment for a single-family home, hypothetically could be the perfect candidate for putting 15% down on a two-unit, with plenty left over as reserves. 

Are interest rates a lot higher? 

Not a lot, no. It’s important to note that the conforming loan limit is tiered for multi-unit properties. Why is this important? Because at today’s historically low rates, taking out a conventional loan comes at a much lower cost than a jumbo loan. The conforming loan limits on rental properties in most of the country are… 

• 2 Unit $702,000 
• 3 Unit $848,500 
• 4 Unit $1,054,500

Rates on two, three, and four-unit properties can fall within as little as one-quarter percent of the rate for a single-family home. Contact a mortgage banker to find out today’s rate on multi-unit properties. 

Does the rent count as qualifying income? 

We get this one a lot. The short answer is yes, 75% of it can count. If documentation of steady, predictable rent payments can be produced, then the net rental income will be factored into the borrower’s DTI. The smoothest multi-unit mortgage processes happen when there are existing tenants in the building, from which the buyer will inherit a 1-year+ lease agreement. An appraiser will also determine “market rent.” This is the amount a landlord can reasonably expect to collect and it is based on area averages, property characteristics, and other criteria. Do you have one or more rental properties already? Use Fannie Mae’s guide to get an idea of what documentation will be needed to use your existing rental income to qualify.

The Long and Short 

Other guidelines, like credit score and maximum DTI, fall very much in line with a traditional one-unit purchase. So, that’s the shortlist of answers to the question “how to buy a rental property”. Looking for the long list? Just give us a call! There are plenty of opportunities out there for buyers to expand their search to include multi-units, and we know just how to secure them.