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Multifamily housing: An innovative avenue for first-time buyers

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An innovative pathway to homeownership

The modest homes that line many of the tree-lined streets on the east side of Providence, R.I., have long been popular with young professionals attracted to the area’s bustling restaurants and college bars. (Adam Glanzman/For The Washington Post)

After graduating college in 2016 with a degree in finance, Frantz Jacques began working as an account executive in Chicago and saving to buy his first home. Raised in a family of homeowners in Evanston just north of the city, he says he realized early on the benefits of owning real estate.

But after a year of facing bidding wars on some listings and being priced out of others, the 25-year-old decided to take an unconventional path to homeownership for a first-time buyer: He began shopping for a multifamily property rather than making a single-family residence his first real estate investment.

Like first-time home buyers in other expensive cities, where high prices and tight inventory have sidelined many millennials, Jacques says the multifamily route will allow him to live in the home while renting the other units to help defray mortgage costs and build equity.

Another advantage is that lenders tend to offer certain incentives for such investments — better interest rates and lower down payment requirements than for single-family properties.

With the help of Sanina Ellison, a principal owner at Chicago Homes Realty Group, Jacques is now looking at two- to four-unit multifamily properties in Bronzeville and South Shore, two South Side neighborhoods with lower prices and increased development.

“I didn’t want to be sitting on the sidelines and playing this waiting game to own a home,” says Jacques, who is financing the investment through a Federal Housing Administration loan, government-backed financing that can be used for properties with up to four units. “It feels like the longer I wait, the more out of reach homeownership would become.”

Long considered the domain of established real estate investors, multifamily properties increasingly are becoming a popular path to homeownership for some first-time home buyers.

Many are millennials priced out of booming property markets in expensive metro areas — from San Diego to Boston — where the inventory of starter homes is tight and prices are climbing faster than incomes. Others are being enticed by earning rental income to help with mortgages as they struggle to balance housing expenses with rising health-care costs and student debt, which hit a record $1.5 trillion this year, according to the Federal Reserve.

Big rise in mom-and-pop investors

The share of home sales bought by investors reached 11.3 percent last year, its highest level in two decades, according to Irvine, Calif.-based real estate data firm CoreLogic.

Ralph McLaughlin, deputy chief economist at CoreLogic, says the increase isn’t from the kinds of big, institutional buyers that gobbled up foreclosed homes by the thousands after the real estate crash. He says it’s being fueled by smaller investors just getting into the real estate game.

“These investors appear to be focusing in the starter-home tier,” says McLaughlin. The “mom-and-pop” investor segment grew from 48 percent of all investor-purchased homes in 2013 to more than 60 percent in 2018, CoreLogic data show. “That’s a sharp contrast to the rise in large institutional investors in the years following the recession.”

Historically low interest rates are also encouraging multifamily investments, says Jamie Woodwell, vice president for real estate research at the Mortgage Bankers Association (MBA). The number of borrowers taking out multifamily mortgages rose 24 percent in the third quarter of 2019 compared with the same 2018 period, a record pace, according to MBA data.

While low interest rates are fueling greater housing demand in many U.S. markets, it’s also shrinking the inventory of entry-level houses for sale. The number of houses priced below $200,000 — a sweet spot for many first-time buyers — dropped 16.5 percent in November from the previous year, according to a report.

Leslie White, an agent with Redfin in Washington, says first-time buyers opting for multifamily investments instead of single-family houses is becoming more commonplace as prices in the District soar out of reach for many younger buyers.

The median price of a D.C. home reached $635,000 in December, a 10 percent rise from December 2018 and more than twice the national average, according to housing data from Long & Foster Real Estate. Housing inventory in the District shrank by 34 percent year-over-year in December, the firm says.

“Younger buyers come to realize they can’t afford the kind of home they want in the area of the city they want to live,” White says. Neighborhoods such as Capitol Hill, Shaw and Petworth — rich with two- and three-unit rowhouses priced from $750,00 to $1.5 million — have been popular with multifamily buyers, White says. “They’re mostly young couples that could never afford to buy a single-family home in these areas and they like the idea of having tenants help pay their mortgage.”

Across the Potomac River in Northern Virginia, where Amazon is set to open a second North American headquarters, Weichert managing broker William Wiard says the frenzy for housing is far outpacing inventory. (Amazon founder and chief executive Jeff Bezos owns The Washington Post.) And that’s pushing a growing number of younger buyers to consider multifamily dwellings, he says.

Redfin calculated that the two housing markets bracketing Crystal City — the location for the Amazon offices — are the most competitive housing markets in the nation.

Wiard says in some cases younger, first-time buyers are partnering to buy multifamily dwelling in an effort to find a home.

“They’re pooling their financial resources in order to keep up with this market,” says Wiard, adding he’s already sold about a third more multifamily listings this year compared with all of 2018. “Many of those properties have gone to first-time buyers because most of them see a multifamily investment as the only path to homeownership in this market.”

Becoming a landlord

The modest homes that line many of the tree-lined streets on the east side of Providence, R.I., have long been popular with young professionals attracted to the area’s bustling restaurants and college bars.

But those east side communities — a short distance from Brown University and Providence College — are also luring a steady stream of first-time home buyers looking to invest in multifamily dwellings, says Nelson Taylor, an agent with Taylor & Associates of Mott & Chace Sotheby’s International Realty.

Median home values in Providence have increased by 38 percent since December 2015 — reaching $235,954 in December 2019 — Zillow data show. Much of the rise is due to the city’s proximity to Boston — 50 miles to the north — and the growing numbers of graduates calling the city home after college.

“It’s a much more competitive market and that’s putting pressure on first-time buyers,” says Taylor. “So the idea of becoming landlords in a two- or three-unit townhouse is much more attractive financially.”

Katrina Demulling and her husband, Derek, were renting in Brookline, Mass., outside Boston when they decided to buy their first home. The couple — who have a 6-year-old daughter — began looking in the Boston area in early 2019, but quickly realized prices were prohibitive.

Boston ranks among the priciest property markets in the country with the median sales price for a single-family house reaching $599,900 in November, figures from Greater Boston Association of Realtors and the Warren Group show.

After a bit of research, Demulling says they decided to skip the single-family route in favor of multifamily property in Providence. “We figured the rental income would offset the mortgage and allow us to buy a bigger place while earning income,” says Demulling, a 36-year-old executive at technology firm in Boston.

In March using Taylor & Associates, the couple closed on a three-family house with an asking price of $430,000 in College Hill, a popular east side neighborhood that includes Brown University and the Rhode Island School of Design. The couple occupy the second level while renting the ground and third levels of the home.

“For the money we spent we’d be lucky if we found a smaller two-bedroom condo in Boston,” says Demulling, who adds her new home measures about 1,300 square feet per floor. “It just made better financial sense for us to find a multifamily and become landlords.”

Like many multifamily buyers, Demulling got a mortgage through a local bank that offered a favorable interest rate and a lower down payment for investing in an owner-occupied dwelling.

Other multifamily buyers are being lured by federally backed loan programs that offer attractive interest rates and lower down payment requirements compared with conventional mortgages.

FHA-insured loans are among the more popular options for multifamily buyers, say some brokers. The program allows buyers to purchase owner-occupied multifamily homes with up to four units with a down payment as low as 3.5 percent in some cases.

Jared E. Paioff, a real estate lawyer and a partner in the New York law firm Schwartz Sladkus Reich Greenberg Atlas, says conventional lenders can be a more arduous route for first-time multifamily home buyers.

They “typically require a larger down payment and less favorable interest rates,” he says. “Because they are not factoring in any rental income from the unit the owner is residing in.”

Of course, becoming a landlord poses potential challenges. Owners are on the hook for everything from fixing roof leaks and bad plumbing to dealing with griping tenants who may not always pay rent on time. 

 “Homeowners need to know that it’s not just about collecting rent,” says Susan Bishop, a broker with Four Seasons Sotheby's International Realty in Rutland, Vt. “Occasionally dealing with late-night repairs and quick fixes around the house should be expected.” 

A lower down payment through the FHA loan program is what enticed Jarvis Thibodeaux to pursue a multifamily property as his first real estate investment.

The 26-year-old business appraiser in Houston says he and his wife liked the idea of building equity while earning rental income, but it was finding a mortgage that required just 5 percent down of the purchase price that ultimately persuaded them.

“The rental units will already allow us to leverage other people’s money to help pay our mortgage,” says Thibodeaux, who is using a Redfin broker in Houston to help find a multifamily property with two to four units in the $500,000 price range. “But the lower down payment actually allows us [to] get started in [the] home-buying process much sooner.”