Unlocking the doors to multifamily property ownership is a significant financial milestone, but it often comes with a complex web of financial requirements. Among these, the down payment is a crucial piece of the puzzle. Whether you’re a seasoned real estate investor or a newcomer to the multifamily market, understanding the intricacies of down payment requirements is paramount. In this guide, we will delve into the world of underwriting multifamily properties, shedding light on the factors that influence down payment demands and offering expert insights to help you navigate this critical aspect of property investment.
Investing in multifamily real estate comes with distinct requirements depending on the type of mortgage, commercial or residential, available for your rental property. The rules differ whether you’re eyeing a property with five units or more or one with precisely four units. Before choosing what type of rental property you will invest in, you need to know the basic qualities to qualify for a rental property mortgage. Here are a few things that you need to consider:
- You must have a credit score, ideally above 680
- Proof of earnings whether you’re employed, run a business or earn commissions.
- Low debt profile, indicating that you have sufficient extra money to cover your mortgage payments.
- Proof that you have sufficient funds to cover the rental property’s down payment and closing costs. Some lenders may also require you to have a reserve fund for expenses as well.
If you recall, choosing the type of rental property dictates different requirements. A property may be classified as residential or commercial based on local zoning by-laws. A simple way to tell if a residential rental property requires a residential or commercial mortgage is by reviewing the number of units in the property. Commercial rental properties are buildings with six or more units, while properties with one to five units (depending on the lender) are categorized as residential. In underwriting a rental property, mortgage terms for commercial properties can be more challenging than those for residential rental properties. This post won’t dive into the complexities of commercial property mortgages; instead, we’ll concentrate on understanding the down payment requirements for residential rental properties. The primary factors that dictate your down payment amount for such properties are the property’s price and the number of units it contains. So, how much do you usually need to put down for residential rental properties? Typically, it falls within the range of 5% to 35%.
To be eligible for a down payment of less than 20%, you must have 1-4 units and be within a residential zoning, the purchase price for the building cannot exceed $1 million, and It must be owner-occupied (you must live in one of the units for at least 1 year).
For owner-occupied rental buildings with 1-4 units, minimum down payment requirements are as follows:
- Owner-occupied with 1-2 units, the down payment is 5%.
- Owner-occupied with 3-4 units, the down payment is 10%.
For investment properties, with six or more units or properties worth more than $1,000,000, a commercial mortgage with a minimum down payment of 20% is required. If you apply for a CMHC loan for such a property, you may find that CMHC has appraised your property for less than your purchase price, forcing some buyers to make larger down payments of up to 35% of the purchase price. Governmental programs are available for affordable housing projects that can help reduce downpayment for such properties to 5% while offering amortization of 40 to 50 years.
In conclusion, understanding the nuances of down payment requirements is crucial for successful multifamily property investments. As you embark on your real estate journey, the knowledge gained from this guide will empower you to make informed decisions, ensuring that your investment endeavours are financially sound and strategically advantageous.
If you would like more information about multi-family real estate investing or have any questions, please make sure to post a comment below or contact us.
