Typically, when individuals embark on their journey as first-time home buyers, their initial considerations often revolve around condominiums, townhomes, or modest starter homes. The idea of contemplating a 4-unit apartment as their initial residential choice seldom occurs to many. Nevertheless, this option could serve as an excellent entry point for establishing a real estate portfolio and securing future financial stability.

In the current mortgage landscape, there are several options available for initiating the home-buying process. Initially, prospective homebuyers must meet with a mortgage lender specializing in owner-occupied financing for 4-unit properties. However, a crucial prerequisite is that the buyer must reside in one of the units while renting out the remaining three—a key condition. The primary advantage is that, as an owner-occupant, the purchaser can acquire the property with a reduced down payment. For instance, if opting for an FHA loan, the down payment can be as low as 3.5%, and conventional programs may offer options with a 5% down payment. This lower initial investment allows entry into the investment realm without the necessity of accumulating a substantial 20% or 25% down payment typically required for a first multi-unit property. Nevertheless, meeting the loan qualifications remains essential, underscoring the pivotal role of scheduling a meeting with a mortgage lender as the crucial first step in the process.

I asked Jodi Showman from CMG Home Loans to provide an example of a conventional owner-occupied 4-unit purchase. Interest rates, prices, taxes, insurance, and miscellaneous expenses all vary, so the prospective homebuyer will need to review each property on an individual basis. The example below shows a purchase price of $$889,000 and a 5% down payment of $44,450. Remember, the homebuyer will be living in one unit but will have rent coming in from the other 3 units to help pay the mortgage payment, a major benefit to this plan. The net impact of this example is that the homebuyer will be paying $2,718 a month to own a $889,000 fourplex—probably about the same as one would pay for a $385,000 condominium. The noteworthy aspect here is that the homebuyer will possess an asset valued at $889,000, which will appreciate at the prevailing rate of housing market appreciation, rather than owning an asset valued at $385,000. In the example below, a 4% appreciation rate is used. No one knows how much real estate will go up or down but based on the history of Front Range Colorado real estate, 4% stands a pretty good chance of being fairly accurate.

• $889,000 Purchase Price 
• $844,550 New Loan Amount
• $44,450 Down Payment @ 5%
• $6759 PITI/PMI at an Interest Rate of 7%
• $1485 Property Expenses
• $8064 Total Estimated Payment-PITI/PMI
• $6846 Current Monthly Income-Based on Current Rent Schedule
• -$1500 Current tenant who pays this amount moves out
• $5346 Remaining Income from the other 3 units
• $8064 – $5346 = $2718 Borrower Contributes Monthly
• Borrower/Buyer only pays $2718 per month to own an $889,000 
  4 Plex. 
• 4% Appreciation of $889,000 equals $35,560/12 months = $2963 per month in the First Year, less $2718 Monthly remaining mortgage payment equals a net profit of equity each month of $244 ($2963-$2718)
• Return on a $44,450 down payment investment equates to a 5.5% return
• $2,718 payment = estimated purchasing power of a single unit price at $385,000

At some point in the future, this purchase is likely to provide a foundation for purchasing another home and hopefully keeping the first 4-unit purchase in the homebuyer’s real estate portfolio.

As part of the decision-making process for this venture, the homebuyer should also consult a CPA to determine any tax impacts. Likely, the homebuyer will also receive a tax benefit for depreciating the investment part of the property. Then the homebuyer can apply those benefits to the formula that Jodi provided in the example above. Since the homebuyer would be living in ¼ of the building, that part will fall under the personal residence rules. The other ¾ will fall under investment property rules. When the homebuyer decides to sell or exchange the property, part of it will fall under the owner-occupied rules and the other part under the investment property rules. The homebuyer will also want to discuss with their CPA how it will impact them, assuming the homebuyer decides to keep the 4-unit after moving into another home.  

Should the homebuyer prefer to avoid the daily challenges associated with managing three tenants, it is advisable to explore the option of interviewing and appointing a property manager. This would enable the homebuyer to reside on the property without the need to handle tasks such as showings, rental applications, leases, and other responsibilities typically undertaken by property managers.

A team of professionals, including a Realtor®, mortgage professional, property manager, attorney, and CPA, can collaborate to devise a tailored solution that suits the homebuyer’s specific needs.

By Duane Duggan. Duane graduated with a business degree and a major in real estate from the University of Colorado in 1978. He has been a Realtor^® in Boulder since that time. He joined RE/MAX of Boulder in 1982 and has facilitated over 2,500 transactions over his career. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail duaneduggan@boulderco.com, call 303.441.5611 or visit BoulderPropertyNetwork.com.