How does financing for a multi-unit building work?

BY BILL RUMBLER SUN-TIMES REPORTER
Courtesy Chicago Sun Times

How much can you afford to pay for a rental building?
A potential 2-flat buyer looking at a $250,000 building typically figures it this way: If the monthly payment on principal, interest, taxes and insurance comes to $2,000 and the rent brings in $1,000 a month, all I have to do is come up with $1,000 a month.
Therefore, I can afford to buy the place with 10 percent down on a monthly household income of $5,000, with 20 percent ($1,000) going toward the monthly payment.
That might be logical from the buyer's perspective, but that's not the way it works in the mortgage finance world, said Sean Lowry of On LaSalle/Pacor Mortgage, a Chicago mortgage brokerage.
Typically lenders will take only 75 percent of the rental income ($750 in this example), add it to your other monthly income ($5,000) and then apply the 28 percent rule of thumb. That is, your monthly housing costs must not exceed 28 percent of total monthly income. In this case, 28 percent of $5,750 is $1,610--not enough to cover the monthly $2,000 cost.
More sophisticated lenders use a different method, said Lowry, who deals with such lenders. They'll subtract 75 percent of the rent directly from the monthly payment ($2,000 less $750 makes for $1,250 a month), then apply the 28 percent rule to the regular $5,000 monthly income. So, 28 percent of $5,000 is $1,400, more than enough to cover the $1,250 that's left of the mortgage payment.
This second method amplifies your building-buying potential, said Raymond Zilionis of Millennium Financial Corp., which offers such a program to Verona Square and Lexington Commons buyers, and across the Chicago area. It assumes the buyer has a normal load of other debts.
With 5 percent down, a buyer typically can borrow up to $300,000 and with 10 percent down, up to $400,000, he said.
It's common for people with incomes of $40,000 to $45,000 to qualify for rental buildings that cost $350,000 to $400,000, he said.