Have you ever wondered whether it’s possible to buy a multifamily property and live in one of the units while renting the others?
This isn’t as difficult as you might think. Many mortgages designed for primary residences will finance a multifamily home — as long as you live there yourself.
The multi-unit rental property strategy
With rent prices soaring, now would be a great time to become a real estate investor — if it weren’t for all the upfront cash needed to buy an investment property.
But there is a way around this hurdle: You could buy a multifamily property, move into one of its housing units, and earn passive income by collecting rent on the other units.
By living in one of the units, you’d be meeting the owner-occupancy rule for your mortgage. That means getting a lower mortgage rate compared to a loan for commercial properties.
This strategy won’t finance an entire apartment complex or a mixed-use development. It will, however, work for a 2-, 3-, or 4-unit property. Some lenders call these properties duplexes, triplexes, and fourplexes.
In this article:
- Duplex, triplex, and fourplex properties
- How to finance a 2-4 unit property
- Multi-plex loan limits
- Being a landlord
- Our recommended lenders for home loans
Owning a duplex, triplex, or fourplex is different from renting out a room in your single-family home.
With multi-family real estate, each housing unit has its own address, its own separate entrance, and its own kitchen, bathroom, bedroom, and utility connections.
Each unit should have the same amenities as standard single-family housing.
Some large single-family homes have been converted into qualifying 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.
The financial advantage of buying a multi-family property
Before we get into financing options for this type of property, here’s an example of the economic advantage of a 2-, 3- or 4-unit property.
For this example, let’s say you’re buying a fourplex.
If you charge each tenant $2,000 per month for rent, you’d collect $6,000 per month in rental income ($2,000 per month times the three units you rent out).
Let’s say the fourplex costs $1 million and you put 5% down on an FHA loan. A 30-year loan term at 5.5% interest would require a principal and interest payment of $5,394 — $606 less than your monthly rental income.
That $606 won’t be pure profit. As the property owner, you’ll be paying taxes and insurance on the entire residential building, and you’ll be responsible for maintaining all the housing units. In this scenario, you might not break even every month.
But, remember, you’re living in the fourth unit, and you’re not charging yourself $2,000 in rent. More importantly, you’re not paying another landlord $2,000 a month in rent. As time passes, you’ll be building equity in your own real estate investment.
Your first step is to identify the proper financing for your property.
Since you’ll be living in one of the units, you can qualify for a mortgage that’s designed for a primary residence. Owner-occupied home loans have lower mortgage rates than commercial real estate loans.
FHA and VA loans, which finance only primary residences, will also work for a multifamily property, and these loan types offer a big advantage: lower down payments and competitive interest rates.
To decide which kind of loan works best, you’ll need to do some math.
Down payment vs cash flow
A lower down payment means you spend less money upfront, but it’ll also mean higher mortgage payments which can stifle cash flow from month to month.
The state of your local housing market is also a factor. If rents have surged in your market, you might be less worried about cash flow. A lower down payment could mean having a bigger budget for building repairs and maintenance as you attract tenants.
In fact, lenders may require you to keep three to six months worth of mortgage payments in your savings account as cash reserves.
Calculate the entire monthly payment
When calculating your monthly mortgage payment, make sure you’re including:
- Principle and interest payments: This pays down your debt on the property; it’s the biggest part of your monthly payment. Some loan calculators show only this portion of the payment
- Property taxes: Mortgage companies add your local property taxes to your monthly mortgage payment
- Homeowner’s insurance: This annual fee will also be collected gradually as part of your mortgage payment
- Mortgage insurance: Most FHA loans include an 0.85% annual fee that’s broken down into 12 installments to be included in your mortgage payment. Conventional loans will require private mortgage insurance premiums if you put less than 20% down
Combining these expenses makes your payment larger. But 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 $6,000 and you collect $5,200 in rent, your payment is drastically reduced. In addition, your renter is helping you build equity faster than you could on your own.
Minimum down payment on a duplex, triplex, or fourplex
Don’t have a 20% down payment? FHA loans require only 3.5% down on 2- to 4-unit properties. That would equal $26,250 on a residential property that cost $750,000.
If you are eligible for a VA home loan, you may qualify for a zero-down loan.
If you want to stick with a conventional loan, you’ll probably need a higher down payment amount. Here are multiplex requirements:
- 2-unit: 15% down payment required ($112,500 on a $750,000 residential property)
- 3-unit: 25% down payment required ($187,500 on a $750,000 residential property)
- 4-unit: 25% down payment required ($187,500 on a $750,000 residential property)
You will need private mortgage insurance for a 2-unit purchase with 15% down. But homebuyers can cancel the PMI policy when the loan balance reaches 80% of the home’s value.
The FHA’s low down payment catch
The FHA’s low down payment of 3.5% would require only $26,250 down on a $750,000 property. This is a fraction of the six-figure down payment required for a conventional loan.
But there is a catch: the FHA’s mortgage insurance premiums (FHA MIP) which protect the lender in case of a foreclosure.
The FHA charges 1.75% upfront and another 0.85% annually in MIP. The annual insurance lasts for the entire life of the loan unless you put 10% or more down. In that case, it goes away after 11 years.
For a $750,000 property, upfront FHA MIP would add $12,665 to the loan amount upfront. Annual mortgage insurance would add about $512 a month to each mortgage payment. This annual premium decreases a little each year as the loan balance grows smaller.
Despite these extra charges, an FHA loan may still be your best option, especially if it lowers your interest rate compared to conventional borrowing. Either way, be sure you’ve weighed the costs before deciding.
Most primary residence loans have maximum sizes that change from year to year. For example, in 2022, conventional loans can’t surpass $647,200 in most U.S. counties; FHA loans top out at $420,680. The VA doesn’t limit loan sizes.
Loan limits for conventional and FHA loans go higher for multifamily properties. Loan caps depend on the number of units.
FHA loan limits for multifamily real estate
- Duplex: $538,650
- Triplex: $651,050
- Fourplex: $809,150
Conventional loan limits for multifamily real estate
- Duplex: $828,700
- Triplex: $1,001,650
- Fourplex: $1,244,850
Limits go even higher in high-cost housing markets
The loan limits above apply to most counties in the U.S. Areas with more expensive real estate have higher loan limits.
For example, FHA loans in Riverside County, Calif., allow a loan of up to $562,350 on a single-family home, but up to $1,081,450 on a 4-unit property. In New York County, N.Y., (Manhattan), an FHA loan on a 4-unit property could reach $1,867,275.
Find your county’s loan limits for multi-family or single-family properties here:
While these loan amounts may sound big, remember that your tenants will help you make payments towards the purchase price.
As time goes on, the borrower will have increasing equity in a very high-value asset. A 4-unit home worth $800,000 today could be worth $900,000 or even $1 million not too long from now. That’s quite a retirement plan!
Isn’t there a downside to owning a row of townhouses or a duplex? Maybe. If you don’t like the prospect of collecting rent each month from your tenants, sharing walls with neighbors,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. You’ll need to be available when things need fixing. If this doesn’t sound like fun to you, property management companies 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 on your own 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-, 3-, or 4-unit property could be a fantastic way to get someone else to help you pay for your home.
Tax implications of a real estate investment
As a landlord, your annual income tax return will be complex. You’ll need to document rental income and also maintenance expenses. It’s possible to write off the mortgage interest on a primary residence loan, which is a nice tax benefit.
A lot of landlords hire an accountant or a tax professional to help keep track of their income and expenses.
In any case, be sure to plan ahead for this new responsibility and check with a tax expert who can help you understand your obligations. Nobody likes to learn the nuances of tax law with the IRS’s filing deadline looming.
Lease agreements protect you and your tenants
Landlords and tenants should agree to terms and then sign lease agreements to make the deal official.
You can find standard lease agreements online, but before signing, you’ll need to understand all your responsibilities and rights as a landlord. Make sure you understand the tenants’ rights, too.
A property management company could help with this if necessary.
How much rent do I charge?
How do you decide how much rent your tenants will owe each month?
The easiest way is to do a quick search on a website that shows rental listings. See what landlords are charging for properties with comparable living space (in square feet) and similar amenities.
Keep in mind that location is a factor with rent prices just like it is with real estate.
If the condominiums down the street charge $2,500 a month for a 2-bedroom, 2-bathroom unit, you might want to use that price as a starting point. However, if those condos include a pool and a fitness center that you can’t offer, maybe you should charge a little less.
Using rental income to qualify for a loan
Speaking of rental income, you may be able to use the proposed rental income from the property you are buying to help you qualify for the mortgage. If you have landlord experience, your chances of using the future rental income are better. However, some loan types allow you to use the income to qualify even if you have no prior landlord experience.
Buying a multifamily property FAQ
What is a multi-unit property?
A property with more than one housing unit is a multi-unit property. These properties can include single buildings with multiple units or properties with multiple buildings. To use a primary residence loan, the property can’t exceed four units, and you’ll need to live in one of them.
Properties with two, three, or four units can be financed with a conventional loan, FHA loan, or VA loan — but only if the owner plans to live in one of the units. FHA loans have much lower down payment requirements, but they also charge higher mortgage insurance fees. VA loans can finance multi-unit properties with no money down.
What is the minimum down payment for a multi-family property?
You could buy a multi-family home with no down payment if you’re a veteran or active duty military member who’s eligible for a VA loan. FHA loans will require at least 3.5% down. Conventional loan down payments vary from 15% to 25% depending on the number of units in the property.
Is buying a triplex a good investment?
Any kind of residential property can be a good investment, especially in a housing market with rising rents. A triplex includes three housing units. A primary residence mortgage loan could finance a triplex if the borrower agrees to live in one of the units and rents out the other two.
Can I buy a duplex with an FHA loan?
Yes, FHA loans will finance a duplex, but only if the borrower uses one of the two housing units as a primary residence.
Can you use a VA loan to buy a duplex?
Veterans and active duty service members can use VA loans to finance a duplex. Since VA loans work only for primary residences, the veteran would need to move into one of the units and rent out the other unit.
Check multi-unit property rates
Multi-unit properties can be a great investment.
Interest rates on these properties vary by loan type and by borrower. A mortgage pre-approval will show what kind of deal you could get.