How Do You Start Out With Multifamily Units

Question

Hi.  I am looking to start with multifamily units but Im wondering how I can afford a decent unit to start with.  What options do I have for finanacing?  I am planning in buying a unit and living in one apartment.  I would appreciate any advice.

Account Closed · Answer

It sounds like you may not have enough of a down payment or income to qualify to buy something in an area that you would find desirable. That is a problem that many first-time homeowners and investors face. There are 2 solutions to this problem:

1) Ask family, friends or other personal connections to lend you money so you have enough for the down payment. But you would still need to show the bank loan officer that you have stable employment and adequate monthly income to cover mortgage payments. If you buy a duplex, they can count part of the estimated rent from the other side as income to cover the mortgage payment; this does not work for more than a duplex, I believe.

2) Buy in a slightly less desirable area that you ARE able to afford without others' help. Very few of us start out living or investing in the home/ area of our dreams. We start somewhere near the bottom, build up income and wealth, and slowly move up in the quality of locations and buildings we buy. You might be surprised how many investors started out investing in terrible areas, then as they saved up the cash flow from their properties, were able to afford to buy in nicer locations.

In both cases, the FHA loan is the most accessible because it only requires you to come up with 3.5% of the purchase price to put down. This does increase your monthly payments, though, because of private mortgage insurance (PMI). So it's a trade-off.

Good luck!

Treasa Manigault · Answer

I know I'm late but thanks for all your comments.

Kiersten Vance · Answer

Hi @Treasa Manigault

I am currently working with several investors looking at multifamily units. FHA is a great way to go to only put down 3.5% as your downpayment. You still have to qualify for the mortgage but can use some of the rent money to help you qualify. Do you have a W2 job or 1099/self employed? You will need to show more job history with a 1099 than a W2 job. I would be happy to chat with you more about it. Feel free to give me a call. I can also recommend a couple lenders to help get you prequalified.

James Wise · Answer

@Treasa Manigault At this stage in the game if you can't get bank financing people you already know are likely your only option for private financing. Mom. Dad. Uncle Dave etc...If that doesn't work I recommend picking up a 2nd or 3rd job and saving until you hit the required metrics to qualify for an FHA loan.

Radley Estrada · Answer

I'm gonna plug the website and recommend downloading the Bigger Pockets Book on Investing In Real Estate with Little or No Money Down.  Another good read is The Wall Street Journal's Book on Real Estate Investing by David Crook.

Also, listen to the BP podcasts as you're driving, at the gym working out, or during your downtime.  There's quite a few podcast that discuss starting out, creative financing, etc.

Good luck!

Natalie Kolodij · Answer

I know lenders I've spoken with will take into consideration 75% of current rents into the calculation.

Sean Connolly · Answer

When getting a loan for a multi family property, at least FHA, is that they will take the rental income from the property into consideration when approving you. So if you normally would be approved for a 300K loan and the property is 350K, they will add in the income from the tenants. I do not know how it is calculated or the limits. It would be best to talk to your mortgage broker, But FHA is best route when you dont have a lot of money starting out, especially in a market like LA.

Adam Bontrager · Answer

Hi @Treasa Manigault,

An FHA loan will allow you to purchase up to a 4-unit multifamily with only 3.5% down so long as you owner occupy one of the units for a specified amount of time.  I'm actually using this strategy myself to purchase a duplex in the Cleveland area.

If I'm not mistaken, you're concerned that you might not earn enough to be qualified for the amount required to purchase a "decent" (by this I'm assuming you mean nice neighborhood, good condition) home.  I think FHA is going to be your best option.  Private money is going to be quite a bit more expensive than the FHA route.  You may need to adjust your search criteria to fit your borrowing range.  I'm not familiar with the Los Angeles market but I would assume it's pretty expensive.

Feel free to reach out if you have any questions about the FHA process.  I'd be happy to help.

Treasa Manigault · Answer

Thanks for your reply.  I was asking how to finance but Ill look into an fha loan.

Treasa Manigault · Answer

Thanks for the reply.  I am looking into FHA loans but how can buy a decent building.  I dont believe they would approve me with enough money to make the purchase. Do you know how to buy with private money then refinance?