Ever wondered if you can buy a home and get someone else to pay your mortgage? You could do just that with the right property, the right mortgage, and the right renters.
The Multi-Unit Strategy
As housing prices have begun to stabilize in most parts of the country and home sales are on the rise, it’s an indication that the housing market is indeed in the “thaw” stage and on the road to recovery.
Likewise, demand for rental property is on the rise. Housing demand has also allowed landlords to demand higher rents.
The combination of low rates and higher available rent means it’s possible that part or all of your mortgage payment can be paid for by a renter. How can this happen? Purchase a multi-unit property, such as a duplex or 3- or 4-unit property. You live in one of the units, and rent out the others.
The Duplex, Triplex, or Fourplex Property
The right property for such an arrangement essentially means how many units are attached to yours. With a duplex, the owner lives on one side and the tenant on the other. A 2-4 unit property, sometimes referred to as a “triplex” or “fourplex,” has two or three available units to rent out.
This is different than having a spare room, or a basement with a kitchenette. A true 2-4 unit property contains legally separate units. County records should show that the property is a multi-unit.
Each unit should have a separate entrance, kitchen, bathrooms, and utility meters. As a rule of thumb, each unit should have the same amenities as a standard single family home.
Some large single family homes have been converted into multi-unit properties, especially in high-density urban areas. This is fine, as long as the property is legally converted, and the changes are on file with the county or local jurisdiction.
Here’s an example of the economic advantage of a 2-4 unit property. If you charge each tenant $1,500 per month for rent, then living in a fourplex will provide you $4,500 per month in rental income ($1,500 per month times the 3 units you rent out).
It’s also possible to buy a multi-unit property as an investment, or rental, property. However, these will be more difficult to finance, as FHA and VA mortgages will not be available. You will be restricted to a conventional mortgage with a high down payment, not to mention a higher interest rate.
Properties with more than four units are considered commercial properties and do not qualify for conventional or government-backed financing such as FHA or VA loans.
How to Finance a 2-4 Unit Property
Your next step is to identify the proper financing for your property. FHA and VA loans are government-backed loans and are issued for owner-occupants only. These loans are available for 2-, 3-, or 4-unit properties. As long as you live in one of the units, the home is eligible for one of these loans.
The first consideration regarding the mortgage is determining the cash flow. The lower your monthly payment and the higher rent, the greater your income from the property.
Here are costs that affect cash flow:
- Principle and interest payments
- Property taxes
- Homeowner’s insurance
- Repair/maintenance costs
Keep in mind that your renter or renters do not need to pay your entire mortgage payment for this strategy to make sense. Even if your monthly payment is $2,000, and you collect $1000 in rent, your payment is drastically reduced. In addition, your renter is helping you build equity faster than you could on your own.
Down Payments less than 20% on Multi-Unit Properties
Don’t have a 20% down payment? FHA loans require only 3.5% down on 2-4 unit properties.
If you are eligible for a VA home loan, you may qualify for a zero-down loan of up to $1 million in some areas. (See next section on loan limits)
If you want to stick with a conventional loan, you’ll need a higher down payment amount. Here are multi-plex requirements:
- 2-unit: 15% down payment required
- 3-unit: 25% down payment required
- 4-unit: 25% down payment required
You will need private mortgage insurance for a 2-unit purchase with 15% down. But you can cancel the PMI policy when your loan balance reaches 78% of the value.
Multi-Plex Loan Limits
Conventional and FHA loans allow higher maximum loan amounts when buying a 2-4 unit property. Multi-unit homes tend to be more expensive than 1-unit homes, so lending agencies take this into account when setting loan limits.
For example, FHA loans in Riverside County, California allow a loan of up to $355,350 on a single-family home, but up to $683,350 on a 4-unit property.
The conventional loan limit on 4-unit properties is currently $801,950, and even higher in some areas. VA loan limits do not increase for multi-unit homes, but higher loan amounts are permitted in high-cost counties.
Here are links to each lending agency’s loan limits:
- Conventional multi-unit loan limits by county
- FHA multi-unit loan limits by county
- VA loan limits by county
While these loan amounts may sound like a lot, remember that your tenants will help you make the payments. As time goes on, you will have increasing equity in a very high-value asset. A 4-unit home worth $600,000 today could be worth $850,000 or even $1 million not too long from now. That’s quite a retirement plan!
How Much Rent do I Charge?
So, how do you determine how much rent your tenants will owe you each month? The easiest way is to do a quick search on a website that shows rental listings. See what landlords are charging for similar properties.
Speaking of rental income, can you use the proposed rental income from the property you are buying to help you qualify for the mortgage? Yes, this is possible. If you have landlord experience, your chances of using the future rental income is better. However, some loan types allow you to use the income to qualify even if you have no landlord experience.
Being a Landlord
Finally, is there a downside? Maybe. If you don’t like the prospect of collecting rent each month from your tenants, sharing walls with neighbors and fixing garbage disposals or replacing a hot water heater at odd hours, being a landlord may not be for you.
When you’re a landlord you’re required to keep the property in good shape for your tenants and be there when things need fixing. If this doesn’t sound like fun to you, property management services can perform all your landlord duties for a monthly fee.
And, there’s always a risk that you won’t be able to find renters for your spare units. Make sure you have adequate cash reserves to make the mortgage payment in this scenario.
Whether you have enough rental income to pay your entire mortgage payment, or to just help out, living in a multi-unit home could be a great strategy. Owning a 2-4 unit property could be a fantastic way to get someone else to help you pay for your home.
Check Multi-Unit Property Rates
Multi-unit properties are a great investment in the future. Owners of these properties take advantage of a solid long-term retirement and income stream strategy.
Tim Lucas (NMLS #118763), Contributor/Editor
Tim Lucas is a mortgage writer with over 12 years of experience as a loan originator, processor, and team manager. Get a live rate quote for your home purchase or refinance at MyMortgageInsider. Visit Tim on Google+, Twitter, and Facebook.