Favoring 2-4 Units (financing)

I’ve touched on this before, but another compelling reason why 2-4 units can be more desirable is because of the types of loans you can get.

We’ve discussed the down payment before:

– 25% for 2-4 units (20% if you’re an owner-occupier) vs. 30% for 5 or more units.

But in this market, with interest rates so low, you want a 30-year fixed loan whenever possible. If you have 5 units or more, you can’t get more than 5-10 years guaranteed, and your interest rate might even be half a point higher.

This is why we call 5 units the no-man’s land for income property financing.  Unless you’re buying with cash (and hope to sell for cash), you’re better off going bigger or smaller.

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Sweet 2-4 Units

You might be thinking “why limit myself?” And you certainly don’t have to. If you have a lot of cash and you plan to flip your property, buying bigger buildings is a great way to invest.

However, the reason I recommend buying a 2-4 unit apartment building is because of the financing options.  Right now, with a 2-4 unit building, you can get a 30-year fixed mortgage with around 3.5% interest rate, depending on your credit and when you read this blog.  If you have 5 or more units your building is considered commercial property and you’ll likely be stuck with a 7-year adjustable rate, and who knows where interest rates will be in 2020.

If you’re on the cusp, remember that the same rule applies for your future buyer, who will be looking for his/her own financing options to buy your property. The more options, the more available buyers, the higher the price. If you don’t care about the resale value, you can pay off your loan fast, and you plan to collect rents into your grandchildren’s retirement, then 5-10 units may be more interesting to you. If you have any questions, contact me or click the “read more” button to leave a comment.

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