FINANCE SPOTLIGHT: By the Numbers
Frequently Asked Questions about Multifamily Financing
With interest rates near 12-month lows and investments in multi-family properties continuing to be profitable, investors naturally have questions about getting the most out of their finance programs. Multi-family finance expert, Kevin Potter from CrossCountry Mortgage sat down with Multifamily Times to talk about what he is seeing in the market and to answer questions that many potential homebuyers have been asking.
MFT: Can Investors use rental income from the units to help qualify for a larger loan?
KP: The answer to your first question is, “Yes.” You can absolutely use rental income to supplement your existing income and qualify for a larger loan. When you secure a property, the appraiser will complete a “rental grid” which looks at comparable rentals in the area by doing a market analysis that will determine “projected rents” for all the units (based on upon bedroom and bathroom count, square footage etc.). Per underwriting guidelines, you are allowed to use 75% of the “projected rents” to offset your mortgage payment and help you qualify. One positive thing to note is that vacant units can still be used to qualify.
Buyers often get hung up on the price of properties – but it’s the value of the rental that drives the cost. So, lower cost buildings will likely generate lower rent, while more expensive ones will generate higher monthly revenue. In the old days, shrewd investors would make their fortunes by crunching the numbers to find the right ratio of price to proposed rental income. Today’s potential investors have the advantage of technology and can use a website like Multifamilyproperties.com to help them estimate this value and find properties that fit their ideal profit margins.
MFT: What are some of the different programs available to investors and how much is required for a down payment?
KP: This is the number 1 question I get…”How much money do I have to put down on a multifamily?” The answer to this question can vary greatly depending upon your situation and intention for the property. If you are a first –
time home buyer, or even a repeat buyer, but plan to occupy one of the units, you can take advantage of the low down payment options through FHA or Mass Housing Finance Agency. Conventional programs such as Fannie Mae and Freddie Mac require greater down payments of 15-25%. For investors looking to put your money to work, you can expect greater down payments. With that said, properties being purchased non-owner occupied as an investment can typically assume 20-25% of the purchase price down as a general rule.
MFT: How long do I need to live in an owner-occupied unit before moving out?
KP: There is no clear-cut answer to this question. If someone is purchasing a multi-family as a primary residence then they are expected to move in and occupy one of the units. Should a year or two down the road circumstances change and life moves you in a different direction – i.e. growing family, job change or move etc. many people will then move out and purchase a single family or alternative property that better suits their needs. The bottom line here is that every situation is different but needs to “make sense” to underwriting.
MFT: Can I pull money out of my existing property to cover my down payment on another property?
KP: This situation we are seeing a lot given the current market and interest rate environment we are in. With interest rates being so low and attractive, and the real estate market appreciating the way it has, many homeowners are capitalizing by leveraging their existing properties by pulling money out to invest in other properties. In some areas, we have seen 10-15% appreciation in a relatively short period of time which has made it attractive and easy to do for homeowners.
ABOUT OUR GUEST: Kevin Potter is a Branch Manager | Loan Originator for Cross Country Mortgages, NMLS ID 41781