2-to-4-Unit Home | How to buy a multi-unit property

Multi-family, 2-to-4-unit homes are affordable and surprisingly easy to buy.

• You don't need perfect credit or a substantial down payment.
• Your future tenants help to pay your mortgage, and the lender may factor this in as income when you apply for the loan.

In Chicago, two, three, and four-flats make up 26% of the rental market. This presents a unique opportunity to collect passive income, build wealth, and benefit from tax breaks unavailable when buying a single-family home. 

What is a 2-to-4-unit property?

A multi-family, 2-to-4-unit property is a type of real estate that contains two, three, or four separate living units within one building. Walls separate the units and have separate entrances, kitchens, and bathrooms but may share common spaces like yards or driveways.

The properties are often referred to as duplexes, triplexes, or fourplexes. In Chicago, we call them 2, 3, or 4 flats. No matter what you call them, one person owns the property, and each unit's rent helps the owner pay the mortgage, tax, insurance, and other expenses.

How much is the down payment for a 2-to-4-unit property?

The down payment for a multi-family, 2-to-4-unit property can vary depending on several factors, such as the purchase price, type of loan, and occupancy—whether or not you'll live there.

Purchase price: Lenders calculate the down payment as a percentage of the purchase price.

Type of loan: The minimum down payment percentage depends on the type of loan you use to finance your purchase. In this article, I'll cover two loan types: conventional and FHA.

• Conventional loans require a down payment of at least 5% of the purchase price.
• FHA loans require a minimum 3.5% down payment.

For example, let's say you plan to buy a $500,000 3-flat. The minimum down payment would be $25,000 for a conventional loan and $17,500 for an FHA loan. 

• $500,000 Purchase price X 5% = $25,000 Down payment
• $500,000 Purchase price X 3.5% = $17,500 Down payment

The down payment is one cost to consider when buying a multi-family property. Closing costs can be substantial. View current rates, payments, and closing costs so you know what to expect when buying a multi-family home.

Why buy a 2-to-4-unit property? 

There’s no other potential investment for first-time homebuyers like a 2-to-4-unit property. It’s an affordable investment that generates income, builds wealth, and earns tax breaks.

You don’t need much money upfront to buy a multi-family home. If you’re going to live in one of the units, you’ll need a down payment of just 3.5% of the purchase price. This means you could qualify for a mortgage to buy a multi-family home with the same cash you’ve saved for the down payment on a single-family home or condo: 

• Loan-to-Value | How to calculate LTV for a mortgage

To take advantage of the potentially low down payment, you’ll need to live in your multi-family home, establishing one of the units as your principal residence. Within 60 days of purchasing your multi-family property, you must move in and continuously reside there for at least one year. After a year, you can move out—and potentially consider buying another multi-family home.

As the owner, you’ll choose the unit you’d like to live in and rent the other unit(s) to tenants. Collecting rent from your tenants for the second, third, and/or fourth units will generate income, helping you repay your home loan.

More people are renting, and this higher demand means higher rental rates. Plus, mortgage interest rates are still low. Because your loan has a low interest rate, your monthly mortgage payments will also be low. This combination of high rents and a low monthly mortgage cost creates the opportunity to generate a steady income stream. 

Suppose you aren’t planning to live in your multi-family property. In that case, your mortgage lender considers the home an investment property. You can still buy the home, but you’ll need more money for the down payment: at least 25%. That’s a big cost difference:

Whether you live in your multi-family home or rent it out entirely, a steady stream of rental income combined with property appreciation and tax breaks can help you build significant wealth. Of course, one multi-family home won't make you a tycoon. Still, landlords are about four times as wealthy as average Americans.

Your wealth—separate from your income—is your money in the bank, investments, properties, and assets minus liabilities like your mortgages. A multi-family home all but promises appreciation, as it’s very likely to increase in value over time.

As your property increases in value, you’ll continue using your rental income to pay down the mortgage loan. This is how your wealth grows over time.

In addition to the potential to earn income and build wealth, rental properties also come with significant tax breaks. Because renting comes with many associated costs, you can deduct some of your related expenses from the rental income you report on your tax return. For example, interest, insurance, depreciation, property taxes, repairs, utilities, and even lost income from vacancies can be deducted from your rental income, offsetting these costs.

How can future rental income help me buy a 2-to-4-unit property? 

You can use this future rental income to increase your purchasing power because you’ll collect rent from one or more units in your multi-family home.

You can afford a higher monthly housing payment using this additional income from your tenants. This increase in what you can afford means you can borrow more for your mortgage, allowing you to purchase a more valuable property. 

“Future rental income” refers to the money you expect to receive from a home you rent out rather than live in. In the mortgage business, we use the term to represent the estimated income a rented property will bring in. When we qualify you for a home loan, we use this number in our calculations.

You can use the rent from a multi-family home to help you qualify for the mortgage. After adjusting for maintenance costs and possible vacancies, the lender will add 75% of the rent collected to your monthly income. 

• How future rental income can help you buy an investment property

Can I use the rental income from a 2-to-4 unit to get a mortgage?

When buying a 2-to-4-unit home, you can use the future rental income from the property to help you qualify for the mortgage. Still, the rules vary depending on the type of loan you use. 

FHA loan: The lender will add up to 75% of the rent you expect to receive to your qualifying income, making getting approved for the loan easier. For example, buy a duplex, and the rental unit generates $1,000 monthly. As a result, you can add $750 to your monthly qualifying income.

Conventional loan: Likewise, the lender will add up to 75% of the rent you expect to receive to your qualifying income. However, there is one significant restriction - you must have a primary living expense, such as a mortgage or rent payment.

The lender will verify that you've made housing payments for at least one year before allowing you to use future rental income from the 2-to-4-unit property when qualifying for the mortgage. 

The following table shows whether you can add a portion of the future rental income from a 2-to-4-unit property to your qualifying income to help you get approved for a conventional loan.

• How to calculate future rental income from a departing residence

How much will a multi-family property cost upfront?

Figuring out how much a multi-family property will cost you is a crucial first step in home buying. Buying a home requires more than just your monthly mortgage payment. Before seriously considering purchasing a multi-family home, you’ll need to determine the amount of your down payment, closing costs, and monthly payments.

For borrowers, mortgage costs are often broken down into two broad categories: your monthly payment and your cash to close. “Cash to close” refers to the down payment and closing costs due when you close on your home. Your monthly payment is due to your lender each month as you repay your loan.

View current rates, payments, and closing costs to see how much a home will cost you. 

To buy a multi-family home, you’ll need 3.5% of the purchase price for the down payment. You’ll pay your down payment to the seller as you close on your new property, and the remaining amount of the purchase price is what you borrow from a lender.

You can’t borrow money to pay a down payment and take out a cash advance from a credit card. Generally, if you can’t prove where you got the money, the lender won’t count it toward the cash you’ll need to close on the home.  

In addition to the down payment, closing costs are the fees you pay when purchasing a home. While many different fees fall under this umbrella, you should expect the closing costs to range from 2-5% of the purchase price. 

• Loan Estimate Explainer        

You may need reserves when buying a property with 3 or 4 units. Reserves are funds you have left over after closing. Typically, lenders require three months of the housing payment in reserve for unexpected vacancies, repairs, or costs you incur as a new owner.

Can a mortgage co-signer help me buy a 2-to-4-unit property?

A mortgage co-signer can help you buy a multi-unit property. However, depending on the type of loan you use to buy a 2- to 4-unit property, you might need a larger down payment when you add a co-signer.

When you apply for a mortgage to buy a 2-to-4-unit property, the lender will consider your income, credit score, and other factors to determine your qualifications. If you don't meet the lender's requirements independently, having a co-signer can provide additional income and creditworthiness to help you qualify for the loan. 

A mortgage co-signer agrees to share the responsibility of repaying your mortgage loan but won't live in the property.

• Conventional loan down payment requirements are the same whether or not you add a co-signer to your mortgage application. For example, you need 5% for the down payment when buying a 2-to-4-unit property with or without a co-signer. 
• FHA loans are popular among first-time homebuyers because they offer lower down payment options. However, when you add a co-signer, the minimum down payment increases from 3.5% to 25% of the purchase price. 

Adding a mortgage co-signer to an FHA loan to buy a 2-to-4-unit property increases the minimum down payment from 3.5% to 25%.

For example, if you use an FHA loan to buy a $500,000, 2-to-4-unit property without a co-signer, the minimum down payment is $17,500, 3.5% of the purchase price. A co-signer increased the minimum down payment to $125,000, 25% of the purchase price. 

Additionally, FHA has specific self-sufficiency requirements for 3 and 4-unit properties. So, if buying a 3-4 unit home with an FHA loan, check out our FHA Self-Sufficiency Calculator to see if the property you're considering passes the test.  

What are the drawbacks of owning a multi-family home?

Like any investment, buying a multi-family home has potential risks, which you should consider before signing a sales contract.

First, when you set out to buy a multi-family home, it could be trickier than searching for a single-family, townhome, or condominium. Finding an affordable multi-family home in good condition and a neighborhood you want to live in is more challenging. 

Next, be prepared to compromise in exchange for the property's investment potential. For example, you might have to commute longer to work or live through renovations.  

Then, finding renters, collecting rent payments, and handling repairs are drawbacks of renting out part of your home. In addition, managing tenants and running repairs could present unique challenges or cost more than expected. 

After that, real estate values can take a hit during certain economic conditions, like a recession. Your wealth could shrink if the property value drops. Depending on market conditions, reselling a multi-family home may be difficult. 

Talk to a mortgage expert at NewCastle Home Loans. Ask questions and get straight answers so you're ready to buy a multi-unit home.  

Mortgage rules for 2-to-4-unit properties

• Down payment, 2-to-4-unit properties, Fannie Mae
• Calculating rental income Fannie Mae
• Calculating rental income for FHA loans