What are Multifamily Rentals?
Multifamily rentals, also referred to multi-dwelling units (MDUs) are separate housing units contained in a single building or several buildings. Some examples include duplexes, triplexes, and apartment buildings. Another common example is a mixed-use building, which combines residential and commercial spaces in one structure.Better Financing Starts with More Options$1.2M offered by a Bank at 6.0%$2M offered by an Agency at 5.6%$1M offered by a Credit Union at 5.1%Click Here to Get Quotes
Multifamily Rentals and the HUD 221(d)(4) Loan Program
Multifamily rentals, also referred to multi-dwelling units (MDUs) are separate housing units contained in a single building or several buildings. Some examples include duplexes, triplexes, and apartment buildings. Another common example is a mixed-use building, which combines residential and commercial spaces in one structure. HUD 221(d)(4) loans can finance apartment buildings with 5+ units, as well as certain mixed-use projects with 5+ residential units, as long as commercial units are limited to 25% of the net rentable area and 15% of the underwritten effective gross income of the property (up to 30% of underwritten EGI permitted in urban renewal areas under Section 220).
To learn more about HUD multifamily construction loans like the HUD 221(d)(4) loan, fill out the form below and a HUD lending expert will get in touch.
What is a multifamily rental property?
A multifamily rental property, also known as a multi-dwelling unit or MDU, is a single building or several buildings with multiple yet separate housing units. Common examples include apartment buildings, duplexes, triplexes, quadplexes, and mixed-use properties. HUD 223(f) loans are available for multifamily properties with 5+ units and can also be used for mixed-use properties, as long as commercial tenants do not occupy more than 25% of net rentable area and do not generate more than 20% of the project's effective gross income. For more information, please visit HUD 223(f) Loans and What is a Multifamily Rental?
What are the benefits of investing in multifamily rental properties?
The major benefit of investing in multifamily properties is the guarantee of reliable monthly cash flow from renters. Since multifamily properties are rented out to multiple individuals or families, there’s a reduced risk of vacancies — even if a tenant moves out, you can anticipate rental income from the remaining occupied units. Additionally, in a strong rental market, you will be able to fill vacancies fast, getting back to the initial, higher cash flow.
A huge benefit of buying your first multifamily investment property early is the ability to take advantage of compounding returns. Over time, small amounts of money invested into multifamily properties can grow exponentially due to the power of compounding returns. This means that the earlier you start investing in multifamily, the more wealth you’ll have in the long run.
Investing in apartment buildings early can also help you diversify your investment portfolio. One of the main benefits of apartment investing is how relatively low risk the asset class is. If the market crashes, that may well wipe out your 401(k) — but odds are, your apartment buildings will be doing just fine.
Sources: The Pros and Cons of Multifamily Investing, The Pros of Investing in Apartments Early
What types of financing are available for multifamily rental properties?
When an investor is looking at residential properties, they are likely going to be looking for conventional mortgage loans that are similar to what would be used for a single-family home. If you aren’t going to be living in the home and you are just using it for an investment, conventional loans tend to be the only option available to you.
However, if you are going to be living in one of the units on the property, it becomes “owner-occupied,” which provides some more options. In those cases, you might also be able to use VA loans or FHA loans since you are technically still living on the property.
For example, if you were buying a triplex, and you live in one of the units while renting out the other two, you would be able to choose from those other loan options. This is because they will generally require that the owner lives in the home that is being financed.
With these loans, you will find that they work the same as a regular loan for a single-family property. This means the down payments are going to be about the same.
What are the requirements for obtaining a loan for a multifamily rental property?
To qualify for a multifamily loan, borrowers typically need to have good credit (660+ is usually ideal) and between 25-30% of the total loan amount as a down payment. In addition, the property itself will need to have a debt service coverage ratio (DSCR) of 1.25-1.30x. This means that the building’s income will need to exceed its annual debt service by at least 25-30%.
What are the tax implications of owning a multifamily rental property?
Investing in multifamily properties comes with several tax incentives. It’s possible to deduct operating expenses and maintenance costs, including management fees, insurance, and marketing costs, or any legal and professional services, such as property management companies. Additionally, investors should be aware of potential capital gains taxes when investing in commercial or multifamily property. When it comes to real estate taxes, the more you know, the more money you can save.
For more information, please see the following sources:
What are the risks associated with investing in multifamily rental properties?
The risks associated with investing in multifamily rental properties include construction costs that have risen dramatically over the past few years, construction delays due to supply chain issues, and the possibility that the renovation work may not be enough to get the desired investment outcome. Additionally, buying multifamily properties is significantly more expensive than buying single-family homes, and buyers should be able to come with around a 20% downpayment, depending on the real estate market or the size of the property. Source 1, Source 2