Simply put, a multi-unit is a property that has 2 or more units. They range from residential (often referred to as multi-family), commercial, or mixed-use (both commercial and residential under one roof). Multi-units can be a great investment to grow your real estate portfolio, open your home office to the public by owning commercial space on your ground level, and supplement your mortgage with a tenant-occupied unit or Airbnb. Purchasing a property with two or more units comes with its own trail of paperwork and set of questions. We’ve gathered some important things to consider so you can be prepared.
Covering your mortgage and investing in your future
In today’s market, for owner-occupants, the multi-unit vibe can be pretty creative and so much less competitive than the single-family genre. FHA loans allow you to purchase such a thing with as little as 3.5% of the purchase price into the transaction. Specific to Philadelphia, the maximum FHA loan amount for a duplex, is $677,200, for a Triplex $818,600, and $1,017,300 for a Quadplex.
PHG agent Dayna Hillis specifically set out to purchase a multi-family as her own permanent residence. “ I had a great experience purchasing my duplex. I had to put in some sweat equity but was able to raise the rent upstairs by $300 dollars. While living in the downstairs unit I am able to cover my mortgage with my upstairs rent. Once I move out I will have a good profit every month to go towards my new mortgage. I highly suggest anyone looking to purchase their first home to consider a duplex or triplex as owner-occupied”.
Dayna also recommends using a realtor with experience with these types of properties. “There can be some difficult negotiations when purchasing a multi-unit property. Often multi-units are tenant occupied. I negotiated for tenants downstairs to move out early so I could get a loan for an owner-occupied duplex instead of paying a higher down payment and interest rate for an investment property. I inherited the tenants upstairs which means I took over the lease agreement and accommodated their lease and rental amount. They then moved out at the end of their lease so I was able to do some renovations upstairs and raise the rent.”
Being a savvy landlord, Dayna also set money aside for repairs, even though her property was move-in-ready. Within a month of ownership, she had to replace one of the water heaters, but her planning paid off. Having a realtor and team that helps answer questions of what to prepare for when becoming a landlord is priceless.
Combining Business with Pleasure
A mixed-use unit combines commercial and residential space. If you are thinking of opening a new business, look to a mixed-use multi-unit to help supplement your mortgage. Live in the residential unit, and operate your business out of the commercial space. Or lease both the residential and commercial units to generate two streams of income. Restrictions on the type of loan used to purchase the property vary, so it is important to speak with your realtor and lender to define your end goal when looking into mixed-use properties.
For example, to purchase using an FHA loan, commercial space can’t exceed more than 49% of the total building’s square footage and you will need to occupy one of the residential units in the building. You will also want to brush up on the specific zoning of the property to be certain the business you’ve been dreaming of is technically allowed in that space. In other words, get to know your CMX’s. Zoning code CMX1 is a commercial mixed-use intended for small-scale, low-impact, neighborhood-serving commercial uses. Think retail, medical office, or small office space. If you want to open a coffee shop or an artisanal ice cream fountain you’ll need some additional documents from the city and L&I for food service. CMX zoning 1,2,2.5 are all Intended to accommodate neighborhood-serving retail and service uses, including pedestrian-friendly retail commercial corridors. Again, having an experienced PHG real estate agent by your side will help you with any of the fine print.
Multi-Generational Living
Many of our clients are touring homes keeping multi-generational living front of mind. Mom and her partner are getting older, skip the move to a retirement community. Instead, keep them nearby by having them set up home in the downstairs unit of your multi-family building. A bonus is if you have the option to pool resources for purchase with siblings or parents you can increase the option to purchase a larger property. Having other tenants in the building can keep your unit and your family unit’s costs down.
Be aware, it can be tricky looking for multi-unit properties. When listing on the MLS (the database that populates Zillow, Realtor.com, and the like), the listing agent has one chance to click a tiny button that classifies the property as having an in-law suite. That’s why you want a Philly Home Girls Realtor that takes the time to pour through the listings for you. They’ll know how to dig deep, sub-search, and reach out to their network to find the appropriate properties to tour. Think of them as a real estate concierge personalized for you!
Different Loans for different properties
Think that owning a multi-unit means you already need to have a number of investment properties under your belt and a wad of cash money under the mattress? Not true! Let’s walk through the different types of loans available for a multi-unit, based on size, zoning, and use.
FHA loan
This may be the best way to purchase up to a 4-unit property as long as the buyer will be living in the property for at least 1 year. After that point, you can move out and collect rent on all the units. Just keep in mind you are only allowed to have 1 FHA loan at a time. The real benefit here is you only need 3.5% for a down payment and your rate is still great even if your credit score is on the lower end. You typically want to be at least a 620 credit score to make this work.
Mixed-Use Property
FHA will allow a mixed-use duplex if the commercial space does not exceed 49% of the total building square footage and the buyer occupies the residential portion as a primary home. Rental income from the business portion of the property can be used to help qualify. Still only requires a 3.5% down payment.
Long Term ARM
Aan ARM can provide the solution to tackle higher interest rates. We can connect you with a lender that offers up to 90% loan (aka 10% down). Thats 5%-10% more buying power than a conventional loan. They can explain the benefits of the competitive rates offered and how they affect a 15, 10 or 7-year ARM.
Conventional Loan
When using a conventional loan you will have to put down at least 15% for a Duplex if you are occupying one of the units. Homes that have 3-4 units require a 25% down payment even if occupying 1 unit. If you are purchasing as an investment property (aka are not going to live in the property), 25% down is required for 2-4 units.
Mixed-Use Conventional
Not as popular of an option as it’s difficult to receive loan approval and also involves a more complex appraisal. It’s only possible with a property that has one unit that is residential and attached to one commercial space. The buyer must operate from the business portion of the unit and live in the residential portion.
Portfolio Lender
A portfolio lender refers to a lender that offers outside-the-box loan types and services for their own loans. You are typically looking at a higher rate and a down payment of 25% or more.
Commercial Lender
Similar to the Portfolio Lender requirements above, but gives you the flexibility to purchase in a business name or do blanket mortgages to cover multiple properties. Some commercial loans will still require the buyer to personally guarantee the loan. Many commercial loans have variable interest rates and shorter terms with balloon payments to mitigate long-term risk.
Breaking Down The Numbers
Bring on those investment dreams! If you’ve been thinking about wanting to purchase a multi-unit, commercial or residential, give us a call. We can discuss your goals, what types of properties you will want to include in your search, and how a multi-unit can get you on the road to producing a supplemental income!
