Using Conventional Loans for Multiunit Properties

When it comes time to park your money into an investment, many people choose income properties. These investments provide reliable growth, regular income, and a steady investment that is all but guaranteed to grow in value.

Like all investments, they have their risks, and real estate can certainly be more of a hassle than other forms of investing. (Repairs, tenant complaints, and property taxes can all be a nuisance and a financial drain.)

However, real estate, when properly managed, remains a solid investment. And it’s not just single-family households, but also multiunit properties that can bring a strong return. Multiunit properties bring more rent checks, diluted risk, and the chance to live on the same property that brings your income.

But multiunit properties, like virtually all other forms of real estate, are expensive. This means you’ll likely need a loan for these purchases. Fortunately, there are many mortgages available, including conventional loans.

The right loan will depend on many factors, but numerous borrowers will find that a conventional loan is the perfect choice for their multiunit property.


Using Conventional Loans for Multiunit Properties

Advantages of a Multiunit Property

For many investors, single-family homes are a great purchase. But multiunit properties bring many advantages over single-unit properties. The biggest advantage is the chance to earn multiple rent checks from one property. If you have a duplex, triplex, or four-plex, you can (assuming all the units are filled) earn multiple checks in a single month from one property, which could potentially increase your returns on the investment. Of course, multiunit properties cost more (generally speaking), but they can also be more profitable.

A multiunit property also reduces the chances of complete vacancy, which would mean no money coming from the property. With a single-family home, if your tenant moves out (or fails to make the payment), you are left with no income from the property. 100% of the rent is lost due to a single tenant.

But what if you have a four-unit property, for example? If all four units are occupied and generating an income, but one tenant moves out, your income is reduced by 25%. Suppose each tenant is paying $600 monthly; at full capacity, you are earning $2,400 monthly, but if one moves out, you are still earning $1,800 a month.

Multiunit properties also give you the chance to live on the same property where you are earning an income. This can be good or bad, but many investors use multiunit properties to start their real estate portfolio. With multi-units, you can get a reasonable loan, live on the property and (essentially) have your tenants pay for your mortgage. You’ll still be responsible for taxes, repairs, and other expenses, but this can be a low-cost strategy for starting your real estate investments.


Advantages of a Conventional Loan

If you decide that a multiunit property is the right choice for your investment strategy, you’ll then need to decide on a type of mortgage. You’ll have numerous options, but one of the most popular choices is a conventional loan, which is a broad category that can include many different types, including jumbo loans.

A conventional loan is simply a mortgage that is not backed, insured, or supported in any way by a government agency. (Excluding Fannie Mae and Freddie Mac, which are government-backed private organizations.)

Conventional loans bring greater flexibility and availability to your lending needs. While non-conventional loans, such as VA or FHA loans, are serviced only by a select group of mortgage institutions, conventional loans are serviced by virtually every lending office in the country, with few exceptions.

The process for qualification, while depending on the lender, can also be easier. There are often fewer steps for both qualification and closing, largely because the federal government is not involved in the process.

The qualifications can also be more flexible and lenient. While government-backed loans have specific requirements, conventional loans can have easier qualifications for, among other things, credit scores, loan limits, downpayments, and debt ratios.

With a conventional loan, you can likely qualify for a larger purchase. One type of conventional loan is the “jumbo loan.” This form of financing is above and beyond the typical amount for loans supported by government institutions, as well as Fannie Mae and Freddie Mac. So if you are looking to purchase a high-value property (we’ll look at the limits below), a jumbo loan may be right for you.

For these reasons and more, many buyers find that conventional loans are the ideal choice when they want to start or expand their investment-property portfolio by adding a multiunit property.


Conforming Conventional Loan Limits for Multiunit Properties 

While jumbo loans can deliver practically unlimited financing (assuming you qualify), conforming conventional loans, which meet the limits set by Fannie Mae and Freddie Mac, have limits. Fortunately, these limits are fairly generous and allow for the purchase of many excellent multiunit properties.

Loan limits for conforming loans are set on a county-by-county basis. In most counties, the base limit is used; this limit changes depending on the amount of properties. The current base limit for a single-unit property, for example, is currently $548,250. However, if you are purchasing a two-unit property, the limit goes up to $702,00. For a three-unit, the base limit is $848,500, while the limit for four-unit properties is $1,054,500.

But if you are purchasing a property in high-cost areas, this limit can be increased. There are high-cost areas in many states, including California, Colorado, New York, Wyoming, and more. Also, these limits are for conforming conventional loans only; if you find that your purchase requires more financing, there are jumbo-loan options available as well. You’ll need to meet the qualification requirements, but you’re not chained to these loan amounts.


Dedicated to Helping Build Your Investment Portfolio Through Excellent Loans

If you want to learn more about purchasing a multiunit property with a conventional loan, contact our staff right away. We’ll help you choose the right financing to meet your specific goals, and we’ll provide the service you need to increase your chances of mortgage approval!