Seeking advice on buying first 4 unit multi-family

[Ryan Dopps]

Hi All - I'm pretty new to the BP community but I'm highly motivated to officially get started with REI via a 4 unit multi-family home. My current plan is to live in the downstairs 1B 1BA apartment, Airbnb two of the 3B 3BA units, and long-term rent the other 1B 1BA apartment. Based on the comps I've been looking at, the Airbnb alone could bring in anywhere from $10k to $16k in revenue per month, which should cover majority if not all of the mortgage. My goal is to put as little money down so that I can furnish the Airbnb units. Here are some questions I could use everyone's advice on:

-  What is the best next step with the pre-approval process for a multi-family where the mortgage is higher than my income? How do you prove that the rental income can cover the mortgage payment? Should I shop around with lenders?

- Assuming I move out of the unit after a year and rent it out, what is the right strategy during the offer stage? Should I attempt to lower the purchase price (which has little impact on my down payment) OR aim for seller credits like a buy-down or closing costs? 

Thank you guys so much for the advice!

[Melissa Hartvigsen]

Depending on the loan product you choose, the lender may be able to count rental income towards your income to help in qualifying.

Using a FHA loan, you can put as little down as 3.5%. However, there is an underwriting guideline that requires self sufficiency on 3 units and 4 units properties. That means in the four plex, the three units that you are not occupying must cover 100% of the mortgage. FHA underwriting typically does not accept short term rental income, unless you have two years of history from the seller using it as a short term rental, and can provide their tax returns to document their profits. If any of the units are vacant, then the appraiser will determine market rent on the vacant units in their rent calculation.

Private money lenders, and commercial loans may give you the flexibility to count the short term rental income. However, they typically come with shorter loan terms, higher down payment requirements, and higher interest rates.

It would be best for you to consult with a lender to make sure that the deal would work. Then after closing, you have the option to do your short term rental experiments.

Make sure you do your due diligence regarding running a short term rental. It may not be permitted with your local city code, or they may only restrict you to a single unit.

Be wary of looking at profits from short term rentals. Many people who run STR's only state their gross income and don't share what they actually are taking home. In my area the vacancy is substantially higher with str than long-term rentals and it ranges between 30 and 50%. The operating costs are also much higher.