The Beginner’s Guide to Duplex & Multifamily Mortgages in MA Roger Odoardi Introduction When it comes to shopping for a home, Massachusetts is a choose-your-own adventure kind of state. On the one hand, the urban bustle of Boston and its surroundings offers great culture, unbeatable entertainment and nightlife options, and properties ranging from beautiful old manor homes to pastel-colored triple decker apartment buildings. On the other hand, Central and Western MA, the North Shore and Cape Cod boast picturesque scenery and a slower pace. Multifamily properties are common no matter where you go; the state’s plethora of colleges and industry hubs make sure of that. Owning a home with rental units is a particularly lucrative route for single or first time home buyers: You can earn a passive income, build your credit and expand your real estate portfolio all at once. Of course, terms and rates can vary by state, county and town, so it pays to do your research. We’ve built this comprehensive beginner’s guide to buying a multifamily home in the Bay State. Table of Contents What is a Multifamily Home? Buying a Multifamily Home in Massachusetts: The Pros Buying a Multifamily Home in Massachusetts: The Cons Know Your Multifamily Loan Options in MA Frequently Asked Questions What is a Multifamily Home? Duplex, triple decker, four-unit Federal — there are many ways to describe a multifamily property in Massachusetts. A multifamily home is a residential building in which two to four families or tenants can live separately; anything with five or more units is considered a commercial property and has different loan requirements. To qualify for a multifamily mortgage loan, each unit of the property must have its own: Kitchen Bathroom Entrance/exit (usually) Address/unit number The owner of a multifamily property can occupy one of the units and rent out the others or live off site and collect rent remotely. If living wall-to-wall with other people isn’t in your long-term plan, don’t feel boxed in: As a multifamily home buyer, owners have the option to live onsite for the duration of their loan terms, then flip the property and turn it into an investment. Whatever they decide, the owner is responsible for managing all repairs, maintenance and utilities for their property. Buying a Multifamily Home in Massachusetts: The Pros There are a number of advantages to owning a multifamily property in the home of Dunkin’ Donuts and the Red Sox. Owning a duplex, triplex or quadplex in MA can: Generate passive cash flow Improve your credit score Enable you to take advantage of attractive loan options and financial assistance Provide the choice between living onsite or being a remote landlord Help close a home sale, provided you can guarantee rental income Give you access to a multitude of communities and landscapes, from oceanside villages to industrial hubs and everything in between Expand your asset portfolio Possibly let you write off home repairs as business expenses Enable you to flip the property into an investment after a period of time Reduce your living costs, since mortgage rates for multifamily homes don’t increase as much over time as single-family rates Buying a Multifamily Home in Massachusetts: The Cons As with most things in life, there is a flip side. Fortunately, the majority of challenges that come with multifamily homeownership in Massachusetts have solutions. Owning a multifamily home in Massachusetts can mean: Challenge: Costly upkeep, especially on older or historic buildings Solution: Many New England-based home inspectors know what to look for and can recommend carpenters and other contractors that specialize in historic homes. Challenge: High tenant turnover, due to large student and temporary worker population Solution: You can stipulate a minimum occupancy period in your lease agreement and establish financial penalties for lessees who violate their terms. This can protect you financially in the event of a vacancy. Challenge: Providing snow removal services Solution: There is an abundance of snow removal services in Massachusetts who offer competitive and reasonable rates. Challenge: Paying higher property taxes (7% above the national average rate) Solution: Refrain from building additions onto your rental property, and shop for homes in communities with lower tax rates. Whether you’ve got your eye on a cedar-shingled seaside cottage or a Back Bay brownstone, it’s important to take note of the cost of upkeep. The homes of Massachusetts have their history written on their foundational beams, sometimes literally — be sure to assess the potential maintenance that comes with a 19th-century apartment building before you close. Know Your Multifamily Loan Options in MA Here are the four most popular multifamily loan options in Massachusetts and their basic terms: MassHousing Cash assistance up to $12,000 As low as 3% down payment MI Plus™ job protection program provides up to six months of financial assistance following a job loss. Federal Housing Administration (FHA) Loan As low as 3.5% down payment Building must be owner occupied Loan cap of $1,581,750 Department of Veterans Affairs (VA) Loan For veterans, active military personnel and surviving spouses No down payment Building must be owner occupied Owners must have prior landlord experience to use rental income for mortgage payments. Conventional Loan Freddie Mac & Fannie Mae Stricter terms than government-backed loans Home Possible by Freddie Mac offers a low down payment of 5%, provided owner occupies one unit, and their income cannot exceed 80% of the Area Median Income (AMI) HomeReady by Fannie Mae offers a low down payment of 3% and offers non-occupying co-borrower flexibility If you’re considering investing in a multifamily property in Massachusetts, Blue Water Mortgage has all the answers you need to begin exploring your options. Contact us today. Frequently Asked Questions Q: What’s the best part of Massachusetts for multifamily homes? A: When you’re starting out on your multifamily property search in MA, it’s best to begin with college towns or cities. Boston — home to Harvard, MIT, Northeastern and dozens more accredited institutions — is the sweet spot for student housing and young working professionals. Any former or current industry hub is also going to offer a wide range of multifamily properties to choose from; explore former mill cities like Lowell, North Adams or Taunton. Q: Can I use rental income to qualify for a loan? A: Yes, but with some stipulations. You can use both current and projected (future) rental income to qualify for FHA and conventional loans, as long as the income is properly documented and/or appropriately adjusted for market rent rates. When applying for an FHA or conventional loan, you can count 75% of your rental income from a property you already own, or the rent you expect to receive from a future property. This applies to the market rent from both owner-occupied and investment properties. Q: How can I finance a duplex or multifamily home? A: Multifamily financing options vary between owner-occupied and investment property loans. Typically, you need to put down at least 15% to buy a duplex and 20% for three- to four-unit properties. Fortunately, the loan you choose could require as little as 3.5% down to get started (0% for VA!). Multifamily mortgages work much the same as single-family mortgages, with 30 years being the standard term. However, there is a national cap on loan rates; be sure to check state and county caps as well. See our Multifamily Loan Options in MA, above. Q: What’s the difference between investment and owner-occupied loans? A: Most multifamily loan options require owners to live onsite for at least a portion of their ownership, even if the resident is a co-borrower (or sometimes even a child of the borrower). Occupying owners qualify for government loans (FHA or VA) only. Investment properties are owned by remote landlords who may work with a property management company to maintain the buildings and address tenant needs. Investors qualify only for conventional loans. Q: What is a non-occupying borrower? A: Say, for example, you want to purchase a multifamily home and occupy it as your primary, but your income or credit profile are not strong enough to qualify on your own. A non-occupying co-borrower is someone who will not live in the home with you, but their credit profile and income are factored into the equation to help you qualify for a mortgage. Q: What are cash reserves, and how much do you need to qualify for a loan? A: Depending on your loan type, you could need anywhere from three to six months’ worth of mortgage payments in liquid cash — assets like your car or other properties do not count. Besides your closing costs and fees, you will need to prove you have enough funds left over to put your mortgage lender at ease, in case of a loss of income. Roger Odoardi Roger is an owner and licensed Loan Officer at the Blue Water Mortgage office in Hampton, NH. Roger graduated from the University of New Hampshire Whittemore School of Business and has been in the mortgage industry for over 15 years. Roger has originated over 1500 residential loans and is licensed in New Hampshire, Massachusetts, Maine, Connecticut and Florida.