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Affordable home financing

Rental apartments are typically thought of as being in large, high-rise property — but that’s not always the case. Approximately 7% of all homes in the U.S. — and one in six rental units — are part of a 2-4 unit building, according to the most recent American Housing Survey.

Historically, one of the biggest barriers families face in obtaining a Fannie Mae-backed mortgage on a 2-4-unit residence has been the significant down payment needed to satisfy the maximum allowable loan limits set each year by the Federal Housing Finance Agency (FHFA). Until recently, that number was 15% for a duplex and 25% for a triplex or fourplex.

The new 5% rule is part of the GSE’s mandate to provide greater access to affordable home financing. To qualify, you must meet specific standards in your credit score, debt-to-income ratio and reserves — and you must adhere to the following GSE loan limits:

  • 2-unit: $929,850
  • 3-unit: $1,123,900
  • 4-unit: $1,396,800

It’s important to note that this isn’t the only affordable loan program for multi-family property purchases. The Federal Housing Administration (FHA) offers mortgages with a minimum down payment of 3.5% — but, unlike Fannie Mae, there’s a mandatory self-sufficiency test for those buying 3-4 unit homes, which stipulates that the rental income must cover the entire mortgage payment, taxes and insurance.

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Should you jump on this opportunity?

There are several advantages to using a Fannie Mae loan to buy an owner-occupied multi-family property.

First off, as a prospective investor, you’ll find it much quicker to save a 5% down payment compared to 15%-25%, which allows you to buy sooner and start generating passive income by collecting rent and building home equity. This is particularly attractive to younger Americans who have yet to find their foothold on the housing ladder.

One X user who responded to Cardone’s post described Fannie Mae’s change as the “best deal for [a] young person or couple who want to invest. They can live in one unit for nothing or a profit and rent rest to cover expenses. Great financial decision.”

While there are “chances to make [an] insane return,” buying a multi-family residential property with the intention of relying on rental income to cover your mortgage and other housing expenses is “also pretty risky for everyone involved,” as one X user pointed out.

For instance, there’s always a risk you won’t be willing to find renters for your spare units, which could leave you in trouble with your lender if you don’t have adequate cash reserves to cover the mortgage and your other housing expenses on your own.

As a landlord, you also take on the responsibility for maintaining the property and dealing with any unexpected problems, like a burst pipe or broken appliances, which may require you to dip into and replenish your emergency savings.

Put simply, the risk is that the 5% Fannie Mae down payment will draw in buyers who can’t keep up with the costs of a 2-4 unit property; it’s a big burden to take on, especially with a lower barrier to entry.

Other ways to invest

If the trials of being a landlord — and living in the same property as your tenants — don’t appeal to you, there are other ways to invest in multi-family real estate.

Investing in a real estate investment trust (REIT) is a way to profit from the real estate market without having to buy a house or take on the stress of being a landlord.

These publicly traded companies own income-producing real estate like apartment buildings, they collect rent from tenants and pass that rent to shareholders in the form of regular dividend payments.

Another easy way to invest in real estate is to buy shares in an exchange-traded fund (ETF) like the Vanguard Real Estate ETF (VNQ) or the the Real Estate Select Sector SPDR Fund (XLRE). Think of these funds as a diversified portfolio of real estate stocks that will pay quarterly dividends.

Finally, you could use a crowdfunding platform, which allows everyday investors to pool their money to purchase property (or a share of property) as a group. Such platforms make real estate investing more accessible to the general public by simplifying the process and lowering the barrier to entry.

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Bethan Moorcraft is a reporter for Moneywise with experience in news editing and business reporting across international markets.

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