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A multifamily home is a building that houses separate units where more than one family can reside. A multifamily home will have a designated kitchen and bathroom for each unit. Each unit will likely have a separate entrance, separate utility shut-off valves and utility meters.

Some examples of multifamily home types could be a duplex, townhome, condo or small apartment. The biggest distinguishing factor in multifamily properties is each has their own legal address. If you rented your finished basement to a friend and your family resides upstairs but you share a kitchen and front door, this would not be considered a multifamily property.

It is important to know the distinction between a multifamily home and commercial property. Properties with five or more units are considered commercial real estate. Commercial loans are different and have their own qualifying criteria and approval process that isn’t as user friendly as applying for a residential loan. Multifamily properties are often referred to as investment or rental property and can be purchased with a residential loan.

MCF Mortgage offers residential loans for owner-occupied properties as well as those purchased strictly as investment property but does not offer commercial mortgages.

Single-family home loans may also be available for buildings with commercial space as well as residential space, as long as the building is at least 51% residential in nature.

There are tremendous tax benefits to real estate investment. Expenses like property tax, insurance, mortgage interest, repairs, and improvements, advertising your property for lease and your property management costs can be deducted.

In addition to those standard deductions, your property might qualify for additional tax benefits of depreciating rental properties. This is done by convincing the IRS that the property in question has a determinable useful life. This deduction is meant to offset the cost of maintenance on a property over time. So, if you plan to hold your investments long term, it may be worth exploring property depreciation with your financial advisor.

If you plan to be an active investor with multiple properties in your portfolio, you should talk to your tax advisor about the ins and outs of 1031 exchanges. A 1031 exchange allows you to sell one investment or business and buy another without incurring capital gains taxes as long as the exchange is completed according to IRS rules and the new property is of the same nature and character as the one being sold.

A 1031 exchange is a deferment, not a credit or reduction. Taxes may not have to be paid at the time of sale, but they will need to be paid eventually.

You can see there are very specific guidelines for a 1031 exchange, so you’ll want to speak with a professional financial or tax advisor to cover all your bases when planning your purchase.

Real estate values are a bit steadier than investments like stocks. Inflation causes the value of stocks to drop but the value of a multifamily property will likely hold steady and in many cases increase in value. The rental property business can’t be outsourced and there is always a need for housing.

There are quite a few types of home loans to choose from when you’re ready to purchase your multifamily property. Each has their own unique features and benefits. We’ll discuss some of them below.

If you don’t qualify for a conforming loan, you can explore a nonconforming mortgage, like a jumbo loan. A jumbo loan is a mortgage that is in an amount above conventional conforming loan limits.

You’ll need the following to qualify:

Credit score: A minimum credit score of at least 680.

DTI: Must be below 45%.

Not all lenders offer jumbo loan options for a second home or investment property. If they do, their requirements could be higher based on your loan purpose and the property type. Anticipate a minimum down payment of 15% of the loan amount.

The Jumbo loan from MCF Mortgage is great for primary residence and rental properties. A Jumbo loan allows investors to borrow up to $2 million for an investment property.

If you’re a qualifying veteran, a VA loan is a great way to start building a real estate portfolio. You’ll need the following to qualify:

Credit score: The VA does not have a set minimum credit score requirement, but most lenders will have their own requirements. MCF Mortgage  requires a minimum credit score of 580 for VA loans. 

DTI: Must be below 41%.

Active-duty service members, reservists, veterans, and surviving spouses of those who passed in service or as a result of a service-connected disability can apply for a VA loan. You will need to meet the standard VA service time requirements and obtain a Certificate of Eligibility. If approved, you can purchase a primary home with up to four units with no down payment. You may also be able to afford a more expensive home through a VA jumbo loan.

Be prepared to pay a one-time funding fee. For a first-time VA borrower, the funding fee is 2.3% of the loan amount. If you’re a disabled veteran or qualifying surviving spouse, you may be exempt from this fee.

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