Multifamily Real Estate: Comparing 1-4 Units to 5+ Units
What Is The Down Payment For A Multifamily Property in Los Angeles?
Conventional Financing Just Changed for Multifamily
As of November 18, 2023, Fannie Mae updated its guidelines to allow buyers to purchase 2–4 unit owner-occupied properties with as little as 5% down, a significant shift from the previous 15%–25% requirement.
This change opens the door for buyers to enter the multifamily market with far less capital than before, while still benefiting from conventional financing.
To qualify, the buyer must occupy one of the units.
Guidelines may vary by lender and borrower qualifications.
Most buyers still assume they need 20%–25% down for multifamily—this change has created new demand that many sellers are not accounting for when pricing their property.
What Is The Down Payment for Multifamily 5+ Units in Los Angeles?
For commercial real estate, such as multifamily properties with 5 or more units, conventional lenders typically ask for a down payment of 20% to 30%. The amount can vary based on the borrower's credit score, the property's income, and the lender's specific policies.
What are Alternative Financing Options for Multifamily And Commercial Properties Investment in Los Angeles?
Hard Money Loans: Down payments vary from 10% to 35%, offering flexibility but at higher interest rates, ideal for short-term financing.
Seller Financing: Here's a creative approach you should consider. You can propose that the seller act as the lender and negotiate the down payment. Typically, the interest rates for such arrangements range from 7% to 10% and can be negotiated. The repayment terms are usually set for 5 years. This way, the seller can serve as the lender and help you buy the property.
Collaborative Investments: Forming a partnership can be a viable strategy for financing a multifamily property.
How can I buy 1-4 investment units in Los Angeles, California With FHA Loan?
FHA Loan Limits for 1–4 Unit Properties in Los Angeles County
For high-cost areas like Los Angeles County, FHA loan limits are significantly higher:
1-unit (single-family): $1,149,825
2-unit (duplex): $1,472,250
3-unit (triplex): $1,779,525
4-unit (fourplex): $2,211,600
These limits reflect the higher cost of housing in Los Angeles and vary by county.
How FHA Financing Works for Multifamily
FHA loans allow buyers to enter the multifamily market with a relatively low down payment—provided they occupy one of the units.
For example:
A 4-unit property priced at $2.1M could require as little as 3.5% down (~$73,500).
Minimum credit score: typically 580+
Down payment: 3.5%
Estimated closing costs: ~3%–6% of purchase price
This creates an entry point many buyers overlook, especially compared to the common assumption that 20–25% down is required.
Important Notes
You must live in one of the units for FHA eligibility
You do not need to purchase at the maximum loan limit
Example: A $1.2M fourplex can still be purchased with 3.5% down, assuming qualification
How to House Hack In Los Angeles?
With the increasing rental prices, living in one unit and renting out the others can be a wise strategy. This can lower your mortgage expenses and make your living costs more manageable. You can use the rental income from the other units to cover your mortgage payments. Furthermore, if you improve the property, you can increase its value and refinance for more funds. This can enable you to purchase more multi-unit properties and expand your real estate portfolio, which can help you advance in the property investment sector.
How Do You Qualify for 5 Units or More When Purchasing a Multifamily in Los Angeles?
Securing a loan for a multifamily property involves meeting various criteria, including:
Borrower's Financial Health: Your net worth, FICO score, and financial stability are critical for lenders.
Property Analysis: The approval process includes evaluating the property’s condition and location. Lenders evaluating an income property focus on the revenue it produces. The property's income is crucial, showing its capacity to manage mortgage payments. A significant metric in this assessment is the debt-service coverage ratio (DSCR), indicating if the property earns enough to cover its mortgage obligations.
Financial Records: Prepare to present tax returns and your detailed financial assets.
These stipulations are foundational for acquiring a loan for multifamily properties, with specifics potentially varying by lender and loan type.
Why Are Rates Higher For Investment Properties?
Interest rates for investment properties are usually higher than for primary homes due to:
Increased Risk: Investment properties are seen as riskier, with a greater chance of loan default. People tend to protect their primary residence more than their investments.
Higher Fees: Fannie Mae and Freddie Mac charge more for these properties, leading to higher rates.
Credit and Down Payment: Rates depend on credit scores and down payments, with investment properties often requiring at least 25% down.
Market Conditions: Current market rates also influence the interest rates on these loans.
Residential Versus Commercial Purchase
5-unit or More Versus 1-4-units:
Lending Criteria:
Residential vs. Commercial: Properties with 1-4 units fall under residential lending criteria, while 5+ units are considered commercial, affecting loan conditions and higher down payments.
Tax Implications:
Consult a CPA: Speaking with a Certified Public Accountant is crucial for detailed tax advice. Owning more units allows for more depreciation benefits and can maximize tax advantages.
Code Requirements:
Local Regulations: Building codes and requirements differ by location. Prospective buyers should consult local planning and zoning departments for specific regulations affecting the property.
Insurance Needs:
Rate Variables: Insurance costs for multifamily and commercial properties depend on many factors. Engaging an insurance broker specializing in these properties is advisable to understand coverage options and rates.
Appraisal Methods:
Valuation Approaches: Properties with 4 units or less are primarily appraised based on comparable sales and income. 1-4 units are considered residential. In contrast, buildings with 5+ units are evaluated heavily on what the building generates. Lenders look at income cap rate, GRI, net operating income, location, etc.
Consult with a few lenders and ask for detailed information on different loan options, such as Fannie Mae, FHA, and Conventional loans. Additionally, they can guide you based on your financial situation and credit score, helping you find a loan that meets your requirements. This will enable you to make an informed decision about investing in multifamily units in Los Angeles.
If you're considering investing in multifamily or commercial properties in Los Angeles, Santa Monica, or surrounding areas, don't hesitate to reach out. We are here to help you navigate the complex details and important considerations necessary for making an informed investment decision.