The Beginner’s Guide to Long-Term Real Estate Investment: Multifamily Properties Made Easy

Ever wondered about the easiest way to dive into long-term real estate investment? Well, look no further. One question I’m asked time and again is about the first property I bought. It was a two-unit property that I held onto for about 12 years, and I can confidently say that investing in a two-unit property is one of the simplest ways to begin your real estate journey. Here's why.

FHA financing for a two-unit property doesn't necessitate reserves. That's a big win for those just starting out. Moreover, two-unit properties are exempt from the FHA self-sufficiency test. This test requires that 75% of all market rents in the building cover the mortgage payment, something that has been harder to achieve with the higher interest rates of 2022 and 2023. But here's the cherry on top - the rental income from the unit you're not occupying can help you qualify for the mortgage, and only a 3.5% down payment is needed, which can even be a gift!

Now, let's not ignore the three-unit property. Historically a popular choice, it also requires only a 3.5% down payment, three months of reserves, and allows for gift money to be used for the down payment. The main difference, of course, lies in the reserves, which can be non-liquid funds such as a 401K loan.

One crucial aspect you need to be aware of is the self-sufficiency test, especially with higher interest rates. Make sure you're consulting with a lender who knows their stuff about this test. If you don't pass, you might find yourself out of pocket after paying for inspections and appraisals, so ensure you're confident that market rents will meet the self-sufficiency requirement.

Next up is conventional financing for the first-time home buyer through Freddie Mac and Fannie Mae. They offer the HomePossible and HomeReady options, which require as little as 5% down payment on a multi-family, with 3% of that coming from your own pocket. It’s similar to FHA in many respects, but one key difference lies in the reserve requirements.

Lastly, I'd like to highlight the importance of local expertise. Whether you're in California or Massachusetts, you need to speak with a local expert who understands the specific nuances of your area's market rents.

In conclusion, there's no one-size-fits-all solution to real estate investment. The key to success lies in understanding all the specifics, from FHA financing to conventional loans, and choosing the option that best fits your individual circumstances. So, whether you're considering a two-unit, three-unit, or even a larger property, remember that knowledge is power. Keep learning, stay curious, and don't hesitate to reach out to experts in the field.

Thank you for taking the time to read. I'm Chad Rankin of the Rankin Mortgage Team in Worcester, Massachusetts, and I'm here to help. Please reach out if you have any questions or need any advice.

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