Buying your first home is an incredible adventure, we’re here to help.
This article is part of a three-part series designed to guide you through the process of getting started in real estate investing.
Buying a home is a day to which we all aspire—or look back on fondly—because it hallmarks personal flexibility and the end of our tenure as a tenant living in someone else’s property. However, if your first home is a single-family property, you might be trading six of one for a half-dozen of the other.
After jumping through all the hoops to secure a mortgage for the new house, you will essentially still just be paying rent. Instead of writing your landlord a check every month, you will be writing one to your bank for the money they paid for your home. In the beginning, only a small portion of that check will go toward reducing your original loan amount, and the interest portion will be the vast majority of the total sum.
The Power of Multifamily Rentals
The typical single-family homebuyer ends up spending between two and five times the amount of equity that they build by paying off the mortgage. Yet, because there is a substantial amount of equity built nonetheless, this same system can be highly lucrative if someone else is taking care of the mortgage payments.
You might be surprised to find out that it’s possible to buy a small multifamily property under the same terms as a single-family home to gain even more flexibility, and it can be no more expensive to set your investment into motion.
Single Family Primary Residence
Small Multifamily Primary Residence
Small multifamily properties combine the best of single-family homes and full-scale investment property. Two-to-four-unit homes are treated just like single-family houses when it comes to mortgage lending, and they can generate significant income, just like an investment property.
There is, however, a common misconception that purchasing a small multifamily home is not attainable for the average first-time homebuyer. Well, I’m here to tell you that it is possible, because I’ve done it myself. Let’s go over the high points of how you can achieve this in your own life.
Benefits of Investing in Small Multifamily Properties
1) Low Cost Upfront
You can finance a multifamily property for as little as 3.5% down on a FHA loan. This is, by far, the lowest widely available down payment for any kind of investment real estate. You can also ask the sellers to pay a significant portion of the closing costs to maximize your initial leverage and bring on someone with strong credit to cosign for you.
When I purchased my first property, I needed to take advantage of all the above. You can even receive the down payment as a gift from a family member or friend.
2) High Debt-to-Income Limits
Your debt-to-income ratio (DTI) is a measure of your new and existing monthly debt obligations compared to your monthly income and is a measure of your personal financial leverage ability. The higher this allowable DTI is, the more you can borrow.
For owner-occupied multifamily properties, this ratio can be as high as 43%, meaning that the mortgage payment can be up to 43% of your paycheck if you have no other debt. This, again, is significantly more ongoing leverage than for any other type of investment real estate and one of the primary tools that I used to get my foot in the door with a modest salary.
3) Use Future Rental Income to Qualify
One of the beauties of the multifamily starter home strategy is that you will begin collecting rent checks as soon as you own the property and can use them to subsidize or pay off the mortgage every month. The bank will allow you to use a portion of that prospective income to help you qualify on paper by increasing your gross effective income mentioned in #2 above. This will allow you to qualify for an even higher recurring mortgage payment and ultimately, a larger investment.
The only caveat here is that there is only one loan program that incorporates all three of these generous loan terms: the FHA 203(b) loan program. This is a highly accessible lending tool, and you can use it to great advantage as long as you plan to owner occupy, or live in the property, for at least one year. This incredible program allowed me to move out of a multifamily rental unit and into a multifamily property of my own at a time when I could not even qualify for a conventional single-family mortgage.
The following articles in this three-part series A Beginner’s Guide to Multifamily Investing will help outline how to progress this idea even further to start building up a small rental property portfolio without much money.