Why do people buy multi-family properties?
Buyers of multi-family properties can have very different objectives in mind. For that reason, a multi-family property caters to a variety of people.
Although the objectives can be different from person-to-person, based on those objectives, we can broadly classify the multi-family properties into two categories:
Owner-occupied properties are those properties where the buyer occupies one of the units as a primary residence. The remaining units in the property are rented out by the owner.
The advantages of owning such a property are:
Lower effective mortgage payment
By renting out the other units, the rent received from those can be used by the borrower to cover a part of the mortgage payment. That effectively lowers one’s own contribution to the monthly payment. For a one-unit property, on the other hand, the buyer has to cover the full monthly payment.
Eligible for Conventional, FHA and VA Loans
For owner-occupied 1-4 unit properties, the owner is eligible to get for all three types: Conventional, FHA and VA
Higher loan limits
Loan limits for 2-4 unit properties are typically higher than those for one-unit properties. It allows the buyer to make a bigger investment.
Lower rates (compared to investment properties)
Rates for 2-4 unit properties where one unit is occupied by the borrower are typically lower than the ones that are purely investment properties.
The other main purpose of buying a multi-family property is as an investment. The big difference is that the owner does not occupy any of the units. Instead, all the units are rented out
The few major differences (when compared to owner-occupied properties) are:
Ineligible for FHA and VA Loans
For 2-4 unit multi-family properties, the owner is not eligible for an FHA and a VA loan. The only loan they are eligible to get is the conventional loans
Higher down payments
The maximum LTV (Loan-To-Value) ratio for a multi-family property used for investment purposes typically tends to be lower.
What that means is that the borrower has to make a higher percentage down payment for multi-family investment properties (compared to owner-occupied).
This of course depends on whether the loan is a purchase, refinance or a cash-out refinance. But for most cases, the required down payment is higher.
For 1-4 unit multi-family homes classified as investment properties, the borrower is required to hold more in reserves.
This is primarily because all units are meant to be rented out. If there is a vacancy in one or more units, the borrower is more susceptible to missing a monthly payment.
For that reason, Fannie Mae and Freddie Mac have stricter requirements on reserves.
Higher rates (compared to owner-occupied properties) Rates are higher for multi-family homes that are classified as investment properties.