Financing a rental property of 1-to-4 units is very different from financing a property with 5 or more units.  Conventional loans on rentals of 1-4 units have standard guidelines set by Fannie Mae and/or Freddie Mac, while loans on properties of 5 or more units typically are portfolio loans and every lender has their own guidelines.

With conventional financing for rentals of 1-4 units, qualifying for the loan takes into account a borrower’s income, assets, credit, and the potential rent (market rent, not current rent)on the building. Down payments can be as low as 25% for 2-4 unit properties.The maximum loan amount for a conventional loan on a rental property depends on the number of rental units: 1 unit max = $625,500; 2 unit max = $800,775; 3 unit max = $967,950; 4 unit max = $1,202,925.

Loans on properties of 5 or more units (“multi-family properties”) are substantially different from conventional loans because lenders want the net income (rents less ALL building expenses) for the building to cover the cost of the mortgage.  A borrower’s other income, assets, and credit are looked at by multi-family property lenders, but they are not the key factors in qualifying for financing.

To calculate net income from a building, the lender generally uses current rents (not market rents, although market rents will be used for empty units), less recurring building expenses (utilities, building management, insurance, etc.) and the property taxes after they have been reassessed based on the new purchase price.  Sellers of multi-family properties need to provide detailed rent rolls and net operating statements to potential buyers so that lenders can determine the financing possible on the building.

Since the lender wants the net income on the multi-family property to cover the new mortgage payment, there is no fixed minimum down payment required: the larger the net income, the smaller the down payment required.  Accordingly, financing available on multi-family properties has to be evaluated case-by-case for each property.  In general, in the Bay Area, given current prices and rents, borrowers have to put down at least 35% (and often 40%+) in order to qualify for multi-family property loans.

Each multi-family property lender also has their own set of products with different rates and terms.  A 30 year fixed rate loan for a property of 5 or more units is rare. Instead, lenders prefer shorter terms (anywhere from 5 to 25 years).  Many multi-family property loans have payments based on a 30 year amortization, but they are due in full much sooner with a balloon payment.  Interest only payments also are available on some multi-family property loans.

Do you want to explore your financing options for a rental property? Feel free to get in touch with me at 415-730-4665 or doug@emortgageservices.net.