2 to 4 Unit Financing Options
Many people want to own a 2-4 residential property to obtain passive income to help with the mortgage payment.
These small residential income properties are also known as a Duplex, Triplex or Fourplex and are an excellent choice for the beginning real estate investor as well as the experienced investor.
For new investors, you'll learn firsthand what it takes to manage a 2-4 unit real estate, generate cash flow, and later on own a larger income producing property such as an apartment building (5 or more units).
An added benefit of owning a 2 to 4 unit income property is that you have that extra layer of security from other rentals helping to pay your mortgage.
To put it simply, you are using other people's money to pay for your growing asset. This technique is commonly referred to as "passive income".
This is a vital aspect when it comes to successful investing.
See the table below to compare the different financing options, interest rates, and cash flow scenarios when buying or refinancing a 2 to 4 unit property in California.
Down Payment Requirements for a Duplex, Triplex, Fourplex
If you are a veteran, will occupy the property and have full income and employment documentation, 100% financing is possible. However, the maximum loan you can get with zero down depends on the county and state.
$965,000 purchase = $0 down on 3 units
Triplex in Oceanside, CA as a Primary Residence
Loan amount of $965,000
1 single loan
30 Yr Fixed at 3.625% = $4,401/month
Rental Income / month = $3,000 on other 2 units
Mortgage Payment / month = $4,401
Effective P + I = $1,401
If you are not eligible for a VA loan, but will occupy the property, can provide full income and job documentation for the most recent 2 years, & have 3.5% down on 2-4 units, you may be eliguble for an FHA Loan.
EXAMPLE of Buying a fourplex with an FHA loan
3.5% down up to $1,200,000 on 4 units (depends on county and state limits);
$1.2M purchase price = 3.5% down (or $42,000)
Loan Amount of $1,158,000 w/ MIP
30 Yr Fixed Rate of 3.25% with Payments of $5,040/month
Rental Income per month = $4,500 on other 3 units
Mortgage Payment per month = $5,040
Effective P + I = $540
IMPORTANT: For FHA 3-4 unit financing, there is a self-sufficiency test the property must pass for a specific loan amount.
If you don't qualify for FHA or VA, and can provide full income and employment documentation your options are a Conventional financing
15% down up to $533,850 on a Duplex;
High cost counties have loan limits up to $800,775.
$940,000 purchase = $15% down or $141,000
Purchasing a Duplex as a Primary Residence
Loan Amount of $799,000
30 Year Fixed Rate at 3.75% = $3,757/month
Rental Income / month = $1,800
Effective P + I = $1,957
If you need a low down payment such as 10-percent on 2-4 units and will occupy it as a primary residence, your option is:
10% down up to $1,500,000
EXAMPLE: 2-4 Unit Property
$1,300,000 purchase = 10-percent down or $130,000
Culver City, CA Triplex - Owner lives in one unit
Loan Amount of $1,170,000 is 90%
5 Year Fixed ARM - Rate of 7.249% = $7,974/month
Rental Income / month = $4,000
Effective Mortgage Payment/ month = $3,917
85% financing drops the rate to 6.75%
Conventional financing offers far better rates if your loan fits into the maximum loan amount guidelines. If not, then this is one option you can use. This is not a commitment to lend. Rates shown above are subject to change without notice.
If your tax returns show little income due to significant deductions, you're self-employed and can provide other income documentation like 12 months of bank statments or have $1 million or more in liquid assets, your options are:
20% down up to $1,000,000;
EXAMPLE: 3-4 Unit Property
$1,250,000 purchase = 20-percent down or $200,000
Huntington Beach, CA Triplex - owner occupant
Loan Amount of $800,000
5 Yr Fixed Rate at 5.375% = $4,417/month
Rental Income / month = $3,000
Mortgage Payment/ month = $4,417
Effective P + I = $1,417
If buying a 2-4 unit as an investor (non-owner occupant), your options are:
25% down with Fixed Rate Mortgage;
35% down with an ARM
Need 720 credit score in high-cost areas. Rates in the high 4 to low 5's.
Non-Prime - Traditional
15% down with 720 score;
Credit score needed is 700+. Rates in the low 7% range.
Bank Statement Loan
25% down with 650 score;
Credit score needed is 600+. Best rates are 700+
Qualify with ONLY Property Income
- 20% down with a 680 credit score; 5/1 ARM from 5.875% and up. No Job and No Personal Income disclosed. Available on 7/1, 10/1 or 30 Year Fixed. Other conditions may apply.
Stated Income Loan
-- loans up to $2 million on non-owner occupied 2-4 units
-- 25% down on a 7/1 ARM with a 650 credit score; 8.99%
-- 600-649 credit score requires 30% down
-- rates start at 7.99% at 50 LTV
Cash Reserve Guidelines for Rental Property
Freddie-Mac and Fannie-Mae mortgages may also be utilized for primary residences or investor-owned properties which create rental revenue.
Underwriters who analyze investment properties focus on the borrower having plenty of funds in a reserve account to deal with potential loss of income resulting from unoccupied units and non-payment of rent by tenants.
Collectively, Freddie and Fannie demand at the very least six months of PITI to be considered for a conventional mortgage on 2 to 4 unit properties.
Liquid Reserves. When looking to acquire a 3 or 4 unit income property using an FHA loan, it's essential to have 3 months PITI in a bank account(s), brokerage account, IRA, etc. Unlike the earnest money deposit, the funds for reserves cannot be in the form of a gift.
FHA Financing Explained
Buying or refinancing a 2-unit property, Duplex, with an FHA mortgage continues in line with the exact same guidelines as it is for a single-family property.
The one variation is that you can add 75% of the monthly cash generated from the other rental to income. In effect, this will raise your overall income to help you meet the debt to income ratio condition for that particular property.
FHA 3 to 4-Unit Conditions
For FHA 3-4-unit mortgage loans, you are still required to use one of the units as your main residence, which means that it's a requirement to live in one of the four units.
The huge benefit here is that you are only required to bring in 3 1/2 percent down of the purchase price.
With a conventional mortgage (Fannie or Freddie), there are higher down payment requirements not to debt to income limits and/or mortgage insurance add-ons that hurt your net income when it's a 2 to 4 unit property. Further requirements for 3 to 4 units using an FHA mortgage loan may apply but overall it is a better down payment option than a conventional financing on a 2 to 4 unit property. A self-sufficiency test comes into play for an FHA-financed triplex or fourplex. Basically, the market rental income from all units multiplied by a .25% vacancy factor must cover the new monthly mortgage payment, insurance, and taxes.
See related info for owners about the Advantages and Disadvantages of Duplexes, Triplexes, Fourplexes
Rates above are examples and may not be actual market rates.
For 5+ Units go to Apartment Loan Financing
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