5% down single family vs 20% down multi family?

Question

Hello everyone! Newbie here, trying to buy my very first property as owner-occupied and I'm very excited! I have a few questions that I want to get some advice from the pros in our lovely community ^^

Background:

I'm renting currently due to a temporary job. I've noticed the rental market is very strong in my area and wanted to buy an owner-occupied property to live in for a year, and rent it out later when I move out of state. I can either do a single-family, or house hack a multi-family (although we have very few options available for multi-family unfortunately). I have locked in an interest rate at 3.625%, which seems very competitive so I wanted to go with this specific lender. However, for this lender, I'll have to put 15% down for duplex, and 20% down for triplex or fourplex. For single-family, I can just put 5% down. I don't have 15% or 20% down payment as cash, but I'm able to raise money from family and friends who can lend me the money immediately when I need it. (I'm transitioning to a job with higher pay and paying off the money I borrowed from family/friends wouldn't be an issue)

Questions:

1. Is it always better to put the lowest down payment possible? I wonder if I should just narrow it down to single family (only 5% down required) and we have way more options in single family than multi-family. With little down payment, I will also have the cash needed for renovation and potentially converting a single-family to a duplex. But with multi-family, I can house hack immediately.

2. If I do single family and want to convert it to duplex, what are the factors I should consider to see if it's worth converting when buying? I read some articles online but they don't dive very deep. Like I need to make sure the zoning allows etc. Of course, I'll make sure it's legal to convert, but I'm more interested in the economical side of things, e.g., how to do the math to figure out if it's a good idea to convert or not? And how do I know if the layout/architecture would make sense for converting?

3. Any advice on finding a good closing attorney and insurance company? Or the difference would be little so it doesn't matter that much? (I hear people talking about finding good property managers a lot more, so maybe attorney and insurance aren't that important?)

4. Starting from home inspection, I think I should keep track of all my expenses/incomes for the property. Do you recommend QuickBooks for beginners? I'll only have 1 property so I'm not sure if I need to use a paid software or CPA. But I also don't know what's ahead of me so it can get tricky if I just go with Excel sheets... Any suggestions for bookkeeping on a small scale?

Thank you so much in advance!

Ben Bolingbroke · Answer

I would agree that it might be better to start with a small simple investment first to avoid some mistakes and headaches (5% down, single family, no money raising). I think usually people look into multifamily because they believe that they can better a better ROI (Cash on Cash return), but something that has worked really well for me is to look for big single family houses with lots of bedrooms and then rent them out by rooms (not sure if you are single, but I am and this has worked out really well). Renting out single family houses in this way makes me way more money than buying and renting a multifamily. I am also buying a single family house right now with a separate entrance to a mother-in-law apartment. So although it technically is a single family house, it looks and rents like a duplex, and lenders will still allow you to put 5% down. Hope this helps!

Eric Chiang · Answer

Lots of great questions here, some of my thoughts below (not answering specific questions in order, per se):

1. If you are going to owner occupy, consider an FHA loan (3.5% downpayment) or NACA program (0% down, but must more hassle). With the FHA loan, you can qualify with a low credit score, but you'll have a 1% PMI for the lifetime of the loan. If the numbers make sense, definitely something to consider. For 3-4 units, would need to pass the self-sufficiency test, so that's also a factor. This doesn't apply for a duplex.

2. It's good that you locked in a good rate with this lender, but I would still consider at least talking to a couple more lenders just to see what type of interest rates/loan option they offer

3. For one property, as other have mentioned, you can probably get away with tracking it via excel sheet. That is how I've done it thus far and it's worked for me. Once you have several properties, you may want to consider things like QuickBooks

4. I do not have enough experience to give advice regarding converting a SFR into a duplex, but just wanted to note that there are several factors that you should consider financially while doing it, such as the construction and applying for permits. Depending on the property, it may be worth the time/effort/money to do so, but consider the opportunity cost of using that time/money for another property as well.

Happy investing!

Dave Skow · Answer

@Yixue Zhao- focus on buying your 1st property as an owner occupied property and minimize your down payment - this will allow you a place to live as you begin learning the process of buying and financing properties

Justin Brown · Answer

RE #1 I always put the minimum down where the numbers still make sense (cash flow, COC return, etc)

#4 open a bank account just for the property and run all the expenses through that account, makes it way easier for accounting... also quickbooks is great

Markus Shobe · Answer

@Yixue Zhao I will let others chime in on the first 3 questions, but I can answer number 4. Yes you should keep track of all your expenses and revenues for the property. No you do not need Quickbooks and I would not recommend it for one property. I would look into wave accounting if you don't want to use excel. It is free and very easy to use.

5% down single family vs 20% down multi family?

5% down single family vs 20% down multi family?

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