Purchasing a 2- to 4-unit property can be a great way to build equity in real estate while using other people’s money to do it.  What many people do not realize is that the money collected in rent from the other units can be used to qualify to purchase the building.

Rental Income

How is rental income determined?
Although a unit may be renting for $1,500/month, when applying for a mortgage, an underwriter will use a different number for qualifying purposes.  When an appraisal is completed on a property, one of the pieces of data the appraiser is responsible to report is the market rent.  If, for example, the appraiser determines the market rent to be $1,600/month, the underwriter will then take 75% of that number and apply that towards the income used for qualifying.  The reason 75% of the market rent is used is to account for vacancies and operating expenses.  When leases expire and tenants move out, there is usually some time when the unit is not rented.  Dishwashers break and sinks clog and these need to be fixed by you, the landlord.  These are examples of the vacancies and operating expenses you will have when owning a multi-unit building.

How do I know if I qualify to buy?
With the new Qualified Mortgage rules in place as of January 10, 2014, 43% is the standard debt-to-income ratio that is allowed (although there are a few exceptions to this that I will not cover here).  What does that mean in real life terms?  An underwriter looks at monthly debt and gross income.  If you earn $60,000/year, then your gross monthly income is $5,000.  Let’s say you were going to purchase a 2-unit building, live in one unit and rent the other.  If we use the figures from the previous example that the other unit’s market rent is $1,600/month, then you would be allowed to add $1,200/month to your income in order to qualify.  That puts you at $6,200/month in income.  43% of $6,200 is about $2,600.  This means that all of your monthly bills, for example car payment, student loans, credit cards PLUS the new mortgage cannot exceed $2,600/month.

How much money do I need for a down payment?
You can purchase a 2- to 4-unit building to live in for as little as 3.5% down.  Again, how does this translate into real life terms?  Keeping with the same example, if you put down 3.5% on a 2-unit building, earn $5,000/month in gross income, the other unit’s market rent is $1,600/month and you had a total of $1,000 in bills from credit cards, student loans and car payments (keep in mind that the minimum monthly payment is used to tally this), then you would be looking at a purchase price of around $330,000 for a property in the Chicago area.  The APR used to calculate that was 4.711% and this percentage changes daily.  Contact a qualified mortgage professional for more information on this.

Purchasing a multi-unit building is a great way to build equity in real estate while using other people’s money.  Your tenants pay the rent, which contributes to paying the mortgage and when you sell the property, you reap the benefits.

Heather McRae

Heather McRae

Please feel free to contact me at (312) 285-6644 with any questions you might have.  And if you are a neighbor in Bowmanville, please say hello!

Heather McRae is a residential mortgage lender.  She was first introduced to the real estate industry in 2001.  Heather lends throughout the State of Illinois and specializes in condos within the City of Chicago.   She is a proud resident of Lincoln Square’s Bowmanville neighborhood.

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