Questions about financing and deciding between 2 - 4 units

[Chris May]

This is my first time starting a discussion on BP. I'm hoping to get some thoughts on financing multi-unit properties and whether I should go for a 2 or 4 unit property.

Some background: My wife and I live in the Bay Area and our house has appreciated tremendously in the last two years. We'd like to lower our monthly expenses so we can do more traveling and other adventures. Long story short, we're selling our house next month and planning to buy a multi-unit building and live in one of the units.

Financing: We'd really like to buy a fourplex, but after selling our home we'll have just over 20% for a down payment of a 1.1-1.3M property (which is the price range for most 4-units in our area). Most banks are saying we need 75% LTV, which we won't be able to do. The part that really confuses me, is we could qualify for a house in that price range based on our income alone, but for whatever reason the banks look at multi-family properties differently.

Can someone explain this to me? I'm having a hard time understanding why a multi-family is any different than a SFH in terms of risk to the bank. Why do we need a larger down payment if we can afford the payments without any help from rents? Are there any creative financing options out there for people in our situation? We found one lender that will do 80% LTV, but I don't really want to put all our eggs in one basket by relying on that lender exclusively. Does anyone know of banks that will allow a HELOC on top of a conventional loan that would put us more in the 18-22% LTV range?

Number of units: Considering the above, does anyone have thoughts on whether we should really extend ourselves on a fourplex, or if we should go for a duplex instead? From my perspective, it makes sense to get more "doors" as people say on here, but I'm wondering if it's better to keep some powder dry if prices correct in the bay area. In other words, we could buy a duplex for around $700k, save half the cash, and then some point in the not too distant future buy a second property. The wall we seem to run into there is that the rates on non-owner occupied loans seem to be much higher.

Anyway, thanks in advance for the insight. We're pretty excited to finally get the ball rolling on this after talking about it for years.

[Chris Mason]

Originally posted by @Chris May:

I just called our mortgage broker again, and he just told us that between the time we first starting talking about this plan (December) and now, several banks have changed their requirement to 20%. So I guess that part is a moot point.

I'd still love thoughts on 2 vs 4 units though considering how high prices are in the Bay Area right now.

 Dammit, you ruined my opportunity to come in and do my little "GOOD NEWS, GUIDELINE CHANGE!!" routine. :(

This announcement came out Feb 17th if anyone is curious.