What Is A Multifamily Home, And Is It Right For You?
Jamie Johnson5-minute read
November 17, 2020
If you’re looking to get started as a real estate investor, you may have heard that a multifamily home can be a great way to generate passive income. Multifamily properties are in high demand right now, mostly because they come with many potential financial benefits.
But what is a multifamily home and how do you know if purchasing one is the best strategy for you? In this article, we’ll explain what a multifamily unit is and some of the pros and cons of buying one.
What Is A Multifamily Unit?
A multifamily home is any residential property that contains more than one housing unit, such as a duplex, a townhome or an apartment complex. If a property owner chooses to live in one of their multifamily units, it’s considered an owner-occupied property.
Here is an overview of some of the various types of multifamily units:
- Duplex: A duplex is a two-story house with a different family living on each floor. They’ll share one front door but both units will have separate entrances.
- Townhome: In a townhome, two families live in one house that is separated by an interior wall. Both families will purchase their unit separately and both homes have an entrance.
- Apartment complex: An apartment complex is a single structure with at least five or more separate units. Residents will often share common resources like a swimming pool, parking garage or playground.
- Semi-detached house: A semi-detached house is a single-family home that shares a common wall with another home. They are similar to townhomes.
The Pros And Cons Of A Multifamily Home
Investing in multifamily homes comes with both advantages and disadvantages. Potential investors should ensure that this type of property fits their budget and needs. Let’s look at some of the biggest pros and cons you should consider first.
Pros Of A Multifamily Home
Listed below are some of the biggest advantages of owning or investing in a multifamily home. However, these pros vary based on location and type of multifamily home you buy.
- More cash flow: The money you earn from tenants could help you offset the costs of the mortgage as well as your own housing. Over time, it could provide you with an extra income stream.
- Larger pools of tenants: Purchasing a multifamily home gives you more units to work with so you can take on a larger pool of tenants. This could make it easier for you to earn your investment back quickly. And if you plan to live in one of the units, you won’t have tenants encroaching on your family’s space.
- More control over property value and repairs: If you live in one of the units, you’ll have more control over the property value and repairs. It’ll be easier for you to catch problems quickly and do damage control when issues do arise.
- Expands investment portfolio: Owning a multifamily home allows you to expand your real estate investment portfolio. And you can earn even more if you choose not to live in the property and rent out all of the units.
- More tax benefits: Many tax benefits come with owning a multifamily unit. You can write off most of the repairs, as well as the interest you pay on your mortgage, as a business expense.
Cons Of A Multifamily Home
Just like with any rental property, there are downsides to buying a multifamily home. Here are the biggest cons to consider:
- Landlord time commitments: Becoming a landlord is a big commitment and one that shouldn’t be taken lightly. And if you choose to live in one of the units, it may mean that you have tenants knocking on your door asking you to fix things.
- Larger purchase price: Investing in a multifamily home is more expensive than buying a single-family home. Of course, the earning potential is higher but there may be times when you don’t have as many tenants renting out units.
- Responsible for all repairs: The property may end up needing quite a bit of work and you’ll be responsible for making those repairs happen.
Multifamily Vs. Single-Family Home Investing
When it comes to investing in a single-family or multifamily property, the biggest difference is going to be the price. A single-family home is less expensive and an easier path to get started as a real estate investor.
You could probably take out a regular mortgage for a single-family home. In comparison, you’ll likely need a commercial real estate loan to purchase a multifamily property. And lenders will most likely require a 20% down payment, especially if you are new to real estate investing.
Single-family properties are also easier to sell so there’s less risk if you realize that real estate investment isn’t the right path for you after all.
However, it’s easier to scale with a multifamily property and earn a higher monthly cash flow. And it’s easier to try “house hacking” with a multifamily property. This means you live in one of the units while renting the others out.
What To Look For When Buying A Multifamily Home
With any multifamily unit, certain key characteristics make the property a good investment. However, potential investors should also consult with a qualified real estate agent about properties in their area before purchasing a new property.
Here are some of the main things you should look for:
- Location: The location where the property is located will be one of the biggest factors influencing how easy it is to find tenants. It will also determine what you’re able to charge in terms of rent. Do your research and find a property in a desirable location.
- Potential rental income: What can you realistically earn in terms of rental income? Do the math and figure out what you’ll need to earn to pay for the mortgage, finance potential repairs, etc.
- Number of units: Obviously, the more units the property has, the more potential tenants you can rent to. Given your budget and what you’re hoping to earn, figure out what the desired number of units is.
- The property’s seller: And finally, you should look into the individual who’s selling the property. Do they have a history of taking good care of the property?
The Bottom Line
There are many benefits to buying a multifamily property and renting it out. It’s a great way to get started as a real estate investor and you have the option to live in one of the units yourself.
However, it’s going to be a large commitment of your time and resources so you should make sure you’re up for the job. If you’re interested in learning more, make sure to research how to buy a multifamily home, and visit Rocket Mortgage® to find the best loan for your purchase.
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