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The Ups and Downs of Buying a Multi-Family Home in Massachusetts Real Estate

By Eleanor Boschert

So, you think you're ready to be a landlord? Buying a multi-family home can be wise investment, if you do it right. Let Mass Realty guide you with facts and smart strategies to help you determine if owning a multi-family home is right for you.

Boston Business Journal reports that Bay State multi-family housing permits nearly doubled in 2012. Up side is that as communities adapt regulations to allow for multi-family housing development, there are more opportunities to purchase one. And, as people are unable to buy single-family homes, they are renting multi-family ones -good for you if you're in the market.

It is tempting. With rents high, vacancy low, and growing demand in a market like Metro Boston, it seems like a smart move to buy a multi-family home to get a piece of the income-producing pie. Whether you choose to invest or live in the home yourself, investor income could defray up to 70% of your mortgage and monthly expenses. There are also tax benefits. And, on down the road, if you need extra living space, you could convert your investment into a single family home or sell when prices rise.

Too good to be true? Well, yes. And, no.

You're smart to look at all sides of the equation.

First, finances. Applying for a multi-family home loan is different than for a single-family one. True, your credit score, income, financial standing, down payment, mortgage insurance, and closing costs are still the driving forces. But, there are two other key factors: how many units are in the property (for size and rental income) and will it be owner-occupied. Either way, you should be prepared to gather more documentation and pay a higher interest rate overall. Furthermore, you will have to put down anywhere from 25-35%, especially if you are not planning to live on the property.

Why? Because lenders consider loans for investment properties riskier and are more reluctant to approve them. Therefore, investors need a higher credit score and cash reserves to qualify.

If you are planning to live in your multi-family home, you can acquire a conventional loan or take advantage of the Federal Housing Administration (FHA) mortgage loan that offers lower interest rates and allows for a 3.5% down payment. More liberal than conventional loan guidelines, FHA allows for lower credit scores, closing costs to be included in the loan, gifts as part of the down payment, and different rental income standards. They also allow for a better ratio of 29% of mortgage payment to income or a 41% debt-to-income ratio for all monthly debt-to-income. On the down side, there are limits to loan amounts, higher mortgage insurance monthly premiums, and it takes longer to complete the process and secure your loan.

Don't count on anticipated rental income to help you qualify for a loan. Conventional lenders evaluate rental property based on income stream, and generally structure a loan on the financial viability of both the property and the lender. If you're a first-time landlord, not all lenders will count potential rental income toward the total income needed to finance your purchase. Lenders like to see a healthy rental history for their investment.

Then there's the business of managing your multi-family home. Small business, that is, with the property, your asset, and tenants, the consumers. As the landlord, you will need to maintain the condition of the asset, provide services to tenants, and produce a profit on all operations.

You're going to have to really be a landlord, actively managing tenant's requests, maintaining the property, and generally keeping the peace between all tenants?and yourself. Think about effort and cost involved with repairs or having to hire contractors.

To keep the income stream flowing to meet expenses, you're going to have to work to keep the units occupied. Turnover and vacancies can cost you, so you'll have to price competitively. You'll need to know the market rates for the area.

Also consider that your property will take longer to sell and more than likely appreciate in value less quickly than a single family home due to physical deterioration from tenants.

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