How to Buy a Duplex Or a Multi-Family Property

What is a duplex or a multi-family home?

A multi-family home is any property that contains more than one unit, while a duplex is a type of multi-family home. A duplex is a single building that has two units joined by a wall or a ceiling. With a duplex or multi-family home, you can live in one of the units and rent out the remaining units, or use the property as an investment property and rent out all of the units.

A multi-family home may sometimes be referred to as a single-family home, as is the case with the Federal Housing Administration (FHA). With a single-family FHA loan, you can purchase or refinance multi-family properties of up to four units. The FHA also offers multi-family property financing, which is for commercial properties of five or more units.

For this article, we’ll refer to multi-family properties as any property that contains four or fewer units. Generally, if a property has more than four units, it becomes a commercial property.

6 steps to buying a duplex or multi-family property

Buying a multi-family property or duplex involves many of the same steps as buying a single-family home.

1. Figure out your budget and financial goals

First, you’ll need to research homes in your area to get an idea of how much you’ll need to save for a down payment. How much you’ll need to save will also depend on the type of loan you get, but most people put down anywhere from 3% to 20%. Next, you’ll need to figure out how soon you want to buy a house so you can determine how much you’ll need to save each month to reach your goal.

Also, think about how many units you’d like your property to have — two, three or four — and whether you want to use it as an investment property or live in one of the units. If you intend to live in the home, you may qualify for an owner-occupant mortgage. If you intend to invest in the home and hold it as a landlord, you’ll generally have to settle for conventional financing since some types of loans aren’t available to investor-owners. Also, if you’re an investor, you’ll typically need to put down a larger down payment.

» MORE: Is buying a house a good investment?

2. Research financing

Mortgage lenders offer a range of loan options to potential homebuyers. Each type of loan has its own parameters and requirements, and some are exclusive to particular populations.

Conventional loans

Conventional loans are available from banks, credit unions and online lenders, and they’re usually not backed by any government agency. However, some conventional loans are backed by government-sponsored entities, like Fannie Mae and Freddie Mac, which require conventional loans to meet set criteria. Conventional loans tend to have stricter credit and debt-to-income (DTI) requirements than government-sponsored conventional loans, and they may require higher down payments.

FHA loans

FHA loans are backed by the federal government but are issued by private lenders. FHA loans require down payments ranging from 3.5% to 10%, depending on your credit score. This type of loan can only be used for a multi-family property if you plan to use it as your primary residence.

VA loans

U.S. Department of Veterans Affairs (VA) loans are available to military members, veterans and their eligible family members. VA loans typically don’t require down payments, mortgage insurance or a minimum credit score. Like an FHA loan, a VA loan can only be used for a primary residence.

3. Compare lenders and get preapproved

Once you know what type of financing is available to you, start researching and comparing mortgage lenders. It’s usually a good idea to compare offers from at least a few lenders. After you’ve done your research, choose a lender to get preapproved with. A mortgage preapproval is conditional approval for a mortgage loan, and it will show home sellers and agents that you’re serious about buying a property.

The qualifications you’ll need vary based on the type of loan. For example, conventional loans generally require a credit score of 620 or higher, while FHA loans require a minimum credit score of 500. You’ll also typically need to meet a certain debt-to-income level.

4. Get an agent to help you search for properties

A real estate agent can help you find multi-family properties that meet your needs. You’ll want to find a qualified and experienced agent to help you throughout the process. You can search for agents online, or ask friends or family members for recommendations of agents to work with. It can also be a good idea to speak with a few different agents before making a choice to see which one you like working with best.

5. Make an offer

Once you find a multi-family property that you’re interested in, you’ll want to submit an offer. Your real estate agent can help you make and negotiate an offer. In your offer, you can include contingencies like a home inspection contingency, meaning the property you’re interested in must pass an inspection for you to buy it.

6. Apply for a mortgage and close the deal

You can apply for a mortgage with the same lender you got preapproved with or a different lender. Consider offers from banks, credit unions and online mortgage lenders to find out which one offers the best rates and terms for you. You’ll then need to apply and get approved for your home offer to be accepted. After that, you’ll finalize your mortgage agreement and officially close on your home.

Bottom line

While buying a multi-family property may seem daunting, it’s fairly similar to buying a single-family property. Even if you have a lower income or credit score, an FHA loan can put a multi-family property purchase within reach. Still, be sure to research offers from multiple lenders so you get the best possible loan for your situation.