'Imagine buying a $100K property with only $5K': Government slashes required down payment to just 5% for this special property type — and real estate moguls are smiling. Should you jump in?

Bethan Moorcraft
'Imagine buying a $100K property with only $5K': Government slashes required down payment to just 5% for this special property type — and real estate moguls are smiling. Should you jump in?
'Imagine buying a $100K property with only $5K': Government slashes required down payment to just 5% for this special property type — and real estate moguls are smiling. Should you jump in?

It just became a whole lot easier for budding real estate investors to get a foot on the multi-family property ladder.

In late November, Fannie Mae — the government-sponsored enterprise (GSE) focused on improving home affordability — slashed its down payment requirements for owner-occupied, multi-family (2-4 unit) properties from 15%-25% to 5%.

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That means you can buy a duplex, triplex or fourplex with just 5% down, live in one unit and then earn passive income from collecting rent on the other units. You can then use that rent money to pay your mortgage and other recurring housing costs like taxes, insurance and maintenance.

This announcement has caused quite the buzz among real estate investors, including Grant Cardone, who has long touted the benefits of multi-family real estate as one of the best ways to generate cash flow. He turned to X to express his excitement: “Imagine buying [a] $100,000 property with only $5,000.”

While that $100,000 price tag for a 2-4 unit property may seem like a pipe dream in today’s housing market, Cardone does have a point: it'll be much easier to get certain GSE loans — but as always, there’s a catch.

Affordable home financing

Rental apartments are typically thought of as being in large, high-rise property — but that’s not always the case. Approximately 7% of all homes in the U.S. — and one in six rental units — are part of a 2-4 unit building, according to the most recent American Housing Survey.

Historically, one of the biggest barriers families face in obtaining a Fannie Mae-backed mortgage on a 2-4-unit residence has been the significant down payment needed to satisfy the maximum allowable loan limits set each year by the Federal Housing Finance Agency (FHFA). Until recently, that number was 15% for a duplex and 25% for a triplex or fourplex.

The new 5% rule is part of the GSE’s mandate to provide greater access to affordable home financing. To qualify, you must meet specific standards in your credit score, debt-to-income ratio and reserves — and you must adhere to the following GSE loan limits:

  • 2-unit: $929,850

  • 3-unit: $1,123,900

  • 4-unit: $1,396,800

It’s important to note that this isn’t the only affordable loan program for multi-family property purchases. The Federal Housing Administration (FHA) offers mortgages with a minimum down payment of 3.5% — but, unlike Fannie Mae, there’s a mandatory self-sufficiency test for those buying 3-4 unit homes, which stipulates that the rental income must cover the entire mortgage payment, taxes and insurance.

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Should you jump on this opportunity?

There are several advantages to using a Fannie Mae loan to buy an owner-occupied multi-family property.

First off, as a prospective investor, you’ll find it much quicker to save a 5% down payment compared to 15%-25%, which allows you to buy sooner and start generating passive income by collecting rent and building home equity. This is particularly attractive to younger Americans who have yet to find their foothold on the housing ladder.

One X user who responded to Cardone’s post described Fannie Mae’s change as the “best deal for [a] young person or couple who want to invest. They can live in one unit for nothing or a profit and rent rest to cover expenses. Great financial decision.”

While there are “chances to make [an] insane return,” buying a multi-family residential property with the intention of relying on rental income to cover your mortgage and other housing expenses is “also pretty risky for everyone involved,” as one X user pointed out.

For one, there’s always a risk you won’t be willing to find renters for your spare units, which could leave you in trouble with your lender if you don’t have adequate cash reserves to cover the mortgage and your other housing expenses on your own.

As a landlord, you also take on the responsibility for maintaining the property and dealing with any unexpected problems, like a burst pipe or broken appliances, which may require you to dip into and replenish your emergency savings.

Or you could end up with a troublesome tenant) who ends up costs you more than rent and maintenance in the long run.

Put simply, the risk is that the 5% Fannie Mae down payment will draw in buyers who can’t keep up with the costs of a 2-4 unit property; it’s a big burden to take on, especially with a lower barrier to entry.

Other ways to invest

If the trials of being a landlord — and living in the same property as your tenants — don’t appeal to you, there are other ways to invest in multi-family real estate.

Investing in a real estate investment trust (REIT) is a way to profit from the real estate market without having to buy a house or take on the stress of being a landlord.

These publicly traded companies own income-producing real estate like apartment buildings, they collect rent from tenants and pass that rent to shareholders in the form of regular dividend payments.

Another easy way to invest in real estate is to buy shares in an exchange-traded fund (ETF) like the Vanguard Real Estate ETF (VNQ) or the the Real Estate Select Sector SPDR Fund (XLRE). Think of these funds as a diversified portfolio of real estate stocks that will pay quarterly dividends.

Finally, you could use a crowdfunding platform, which allows everyday investors to pool their money to purchase property (or a share of property) as a group. Such platforms make real estate investing more accessible to the general public by simplifying the process and lowering the barrier to entry.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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