You'd like help with your monthly housing costs, but don't want a roommate. You want to invest in real estate, but rental properties can be difficult to finance. Why not buy a duplex and rent out the second unit? With the right home loan, you can buy both a residence and rental -- with as little as 3.5 percent down.Â
Many people just like you are doing it right now. Multi-family residences -- duplexes, triplexes and four-plexes -- make up nearly 20 percent of all rental units in the country. And today's low rates can help you increase the return on your investment.Click to see today's rates (Jan 24th, 2017)
If you buy a one- to four-unit rental property with a conforming residential mortgage, you'll need at least 25 percent down. Lenders also require emergency savings to cover at least six months of payments.
But if you occupy one of your units, the property can be financed as a primary residence. Programs backed by the FHA, VA, Fannie Mae and Freddie MacÂ allow you to use part of the rental income (usually 75 percent) to qualify for your home loan.
Downpayment requirements range from zero for a VA loan to 3.5 percent for an FHA to five percent for a conforming home loan.
Interest rates and loan fees when you buy a duplex are similar to those of single family homes. There may be some risk-based surcharges, and your property appraisal will cost more, but terms are much better when you live in one of the units than when you don't.Â
Bruce Ailion, attorney and Realtor with RE/MAX Town and Country in Atlanta, notes another advantage -- thatÂ maximum loan amounts are higher for two- to four-family homes.
â€śIn my Atlanta market," Ailion says, "The loan limits for a conforming Freddie, Fannie or VA loan or an FHA loan on a duplex are $533,850 and $459,300, respectively; on a fourplex, theyâ€™re $801,950 and $690,000, respectively."
The less you pay for your financing, the better the return on your investment. Because financing for primary homes is cheaper, living in one unit gives you an advantage over other investors.Â
â€śYou can borrow possibly with only five percent down at approximately a four percent interest rate and buy a property that may generate at least a seven percent rate of return annually, which greatly magnifies the return on your equity invested,â€ť says Ailion.
â€śConsider that, in Atlanta, the average annual return on a rental duplex is 8 to 14 percent once the loan is paid off.â€ťClick to see today's rates (Jan 24th, 2017)
According to the Urban Institute, purchasers of multi-unit homes tend to have lower incomes and credit scores than buyers of single-family properties. The income from the extra units helps them qualify for mortgages.
These additional strategies can help you buy a duplex or other multi-unit property if money is tight:
On the other hand, if you can afford the payment for a 15-year mortgage, you get a lower interest rate and can own your investment outright in half the time.
Before you buy a duplex, make sure youÂ have the time, skills and patience to be a live-in landlord.
â€śThe job comes with many risks, including the ability to repay, cost of maintenance, plumbing repairs needed, electric blackouts, appliances that break, local and state regulations, fire codes, and taxes and insurance required,â€ť says Arik Kislin, real estate developer and CEO of New York City-based Linx Industries.
Expect tough stuff. And if you can't handle it, add management fees to your potential expenses when you evaluate a property.
â€śIf they donâ€™t pay the rent, can you evict a family with a pregnant woman or a single mother who spent rent on a car repair so she could keep her job? Or what if you get a tenant who is abusive to their spouse, is an alcoholic, becomes a hoarder or files bankruptcy?â€ť asks Ailion.
Be aware that selling a two- to four-unit property down the road can be more difficult than trying to unload a single-family home.
â€śInvestors are your primary market, but theyâ€™re typically willing to pay less than an owner-occupant,â€ť says Ailion. â€śThe gains in cash flow during operation of your rental are offset by a lower percentage gain on sale.â€ť
In the long-term, however, multi-family property can prove a sound investment.
â€śReal estate is one of the best ways to invest your money,â€ť Kislin says. â€śBut you need to do your homework, make sure youâ€™re well acquainted with the neighborhood, the building youâ€™re purchasing, and future plans for surrounding buildings, and be willing to take risks.â€ť
Today's mortgage rates for multi-unit property can be slightly higher than they are for single family homes. For government-backed loans, however, there is no surcharge if you buy a duplex, triplex or four-plex.Click to see today's rates (Jan 24th, 2017)
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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2017 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)