by Amy Lillard
Nov 28, 2007 - While the greater housing market seems to sink deeper and deeper into danger, multifamily properties are still a strong investment.
According to industry experts, demand for multifamily housing is surging as potential homebuyers look for a better option. Renting property allows them to bypass tough mortgage requirements, higher payments, and dropping home values.
What are multifamily properties? These buildings are freestanding, composed of two to four separate and complete living units. Some structures have all the units on a single ground level, while others have multiple floors. Additionally, buildings can be made up of multi-floor units built under the same roof, called townhouses.
With the strong forecast in multifamily return on investment, many real estate investors are particularly preferential towards these properties. They've always been popular for several key reasons:
How does financing work for multifamily housing? For buildings that range from two to four units, lenders consider the loans residential. Higher than 5 units mean a commercial loan. With residential loans, there are much more opportunities to finance and loans can come from regular mortgage lenders.
Since multifamily housing is considered residential, the financing for individual homes and multifamily properties is similar. Lenders examine income and expenses, property condition, and credit. For multifamily properties lenders also look at the property category, future growth, and the overall risk.
Generally, the more units a property has, the tougher the requirements for a mortgage loan. Rates (30 year mortgage rates) are typically higher as well. Lenders view multi-unit properties as a higher risk; vacancies can mean income problems for borrowers, and ultimately problems paying back the loan. Lenders protect themselves through these more stringent requirements and higher rates.
While the relative ease of multifamily investment is an advantage, there are definite risks and disadvantages:
The decision to take on a multifamily property as real estate investment is not one that should be taken lightly. But with careful planning, and the housing environment as it exists today, investors do stand to make a profit.
A frequent contributor to ERATE® since 2006, Amy Lillard is a freelance writer specializing in turning complex information into useful tips and tricks for readers. For questions or topic suggestions, contact Amy at [email protected]
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