THE rental market’s strength may be enticing some buyers to look at multifamily properties, but qualifying for a mortgage on rental units is often more difficult than on a single-family residence.
“It looks a lot easier than it is,” said Neil B. Garfinkel, a partner in charge of the real estate practice at Abrams Garfinkel Margolis Bergson, suggesting that anyone new to this subject work with a real estate professional experienced in rental properties.
But the extra effort may be worthwhile for some people looking for income, or at least help with covering monthly expenses.
A recent report by Frank E. Nothaft, the chief economist for Freddie Mac, noted that “the rental market has been a bright spot in the housing sector this year,” as more households postpone home-buying because of the uncertain economy. The overall rental vacancy rate in Manhattan is hovering around 1 percent, while rents are up for all kinds of apartments.
Mr. Garfinkel, who is also an owner of apartments in Brooklyn and the Bronx through aninvestment firm, says buyers of multifamily property will need to do their due diligence on all the active leases and any service contracts for the building, including the employment terms of the superintendent.
Some lenders are more comfortable lending for property with tenants in place, said John Manning, aBrooklyn mortgage broker, while vacant buildings would be fine with others.
Mr. Manning’s advice: “Expect to put down 25 to 35 percent, or even more, as a down payment,” well above the 20 percent typically expected these days on single-family loans.
He also notes that because multifamily properties are considered riskier, government agencies like Freddie Mac impose a “risk-based pricing adjustment,” which adds a quarter to a half percentage point to the mortgage rate (or buyers can pay a fee equal to 1 percent of the loan amount).
The size of the multifamily building determines how lenders evaluate it. A two- to four-unit residence can usually be financed under Fannie Mae’s conventional mortgage guidelines, but if the owner does not plan to live there, he or she can expect to pay a higher mortgage rate. Borrowers’ incomes, credit scores and financial standing will be key.
Mortgages for buildings with five or more apartments generally fall in the nonconforming-loans category, and may even be considered a commercial mortgage. The lender will be evaluating these rental properties as if they constituted a small business, Mr. Manning said, which means it will want to make sure that the rents cover the mortgage and other expenses.
In many cases, these loans will come from a bank’s commercial lending department. Sometimes local or regional banks will offer them, but only if the property is in their area, according to Mark Lazar, an owner of Allied Financial, a mortgage brokerage in River Edge, N.J.
Mr. Lazar says that those considering renting out their primary or second homes shouldn’t assume that the rental income will help them qualify for a mortgage. Many lenders require a homeowner to have at least 30 percent of the home’s value in equity before counting any rental income.
For a first-time landlord, he added, only about half of lenders will count the rental income toward the total income needed to finance the multifamily purchase.
“If you do not demonstrate experience as a landlord,” Mr. Lazar said, “we will not allow the credit to income,” even if the rent checks have come in steadily for the previous owner.
Multifamily buyers should also consider the tax implications, including some favorable deductions for maintenance, snow removal and depreciation.