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What Is A Multifamily Home, And Is It Right For You?

Victoria Araj5-minute read

September 19, 2022

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If you’re looking to get started as a real estate investor and considering different types of houses, a multifamily home can be a great way to generate passive income. Multifamily properties are in high demand, 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? Let’s walk through what a multifamily home is and look at some of the pros and cons of this investment property.

What Is Multifamily Housing?

A multifamily home is any residential property containing more than one housing unit. A duplex, townhome or apartment complex is a good example of a multifamily home. If a property owner chooses to live in one of their multifamily units, it’s considered an owner-occupied property.

Here’s an overview of various types of multifamily housing 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.

  • Townhouse: In a townhouse, two families live in one house separated by an interior wall. Both families will purchase their unit separately, and both units have a separate entrance.

  • Apartment complex: An apartment complex is a single structure with at least five or more separate housing units. Residents will often share common resources like a swimming pool, parking garage or playground.

  • Semi-detached house: Similar to a townhome, a semi-detached house is a single-family home sharing a common wall with another home.

Many of these property types can be funded with a traditional mortgage, while others might require a commercial loan. Rocket Mortgage® doesn’t offer commercial loans, but we can help you get a regular loan to purchase a 2 – 4 unit multifamily property.

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The Pros And Cons Of A Multifamily Home

Investing in multifamily homes comes with advantages and disadvantages. Potential investors should ensure that this type of property fits their budget and needs. Let’s look at some of the pros and cons you should consider first.

Pros Of A Multifamily Home

Below are some of the biggest advantages of owning or investing in a multifamily home. However, these pros can vary based on location and the type of multifamily home you buy.

  • More cash flow: The money you earn from tenants can help offset the costs of the mortgage as well as your own housing. Over time, it could provide you with an extra income stream.

  • Larger pool of tenants: Purchasing a multifamily home gives you more units to work with so you can take on a larger pool of tenants, making 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 to catch problems quickly and do damage control when issues arise.

  • Expanded 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 housing unit. You can write off most of the repairs, and the interest you pay on your mortgage, as a business expense.

Cons Of A Multifamily Home

Just like with any rental property, buying a multifamily home has downsides. Here are the biggest ones 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 tenants knocking on your door asking you to fix problems.

  • 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 you may have fewer tenants renting at some times than others.

  • Responsibility for all repairs: The property may end up needing quite a bit of work, and you’ll be responsible for making those repairs happen.

Single-Family Vs. Multifamily Home Investing

Investing in a single-family property versus a multifamily property involves a few key differences.

Price

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.

Mortgage

Depending on what type of building you’re looking at, you might need a commercial real estate loan to purchase a multifamily property. Most lenders will likely require a 20% down payment, especially if you’re new to real estate investing.

Rocket Mortgage doesn’t offer financing for commercial real estate, but we can help you fund the purchase of a single-family home or a multifamily property of up to four units. Be sure to look through your loan options to find the best fit for your financial plans.

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Apply online for expert recommendations and to find a solution that works best for you.

Risk

Single-family homes are also easier to sell, so there’s less risk if you realize that real estate investment isn’t the right path for you.

Scalability

It’s easier to scale and earn a higher monthly cash flow with a multifamily property than with a single-family house. And a multifamily property is more conducive to “house hacking,” which means you – the property owner – lives in one of the housing units while renting the others out.

What To Look For When Buying A Multifamily Home

With any multifamily housing 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 multifamily property.

Here are some of the main items you should look for:

  • Location: The location of the property will be one of the biggest factors influencing how easy it is to find tenants. It will also determine what you can charge in rent. Do your research and find a property in a desirable location.

  • Potential rental income: What can you realistically earn in 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 in the property, the more potential tenants you’ll have. Figure out the best number of units for your budget and what you’re hoping to earn.

  • The property’s seller: Get acquainted with the person selling the property. Do they have a history of taking good care of the property?

The Bottom Line

Buying a multifamily property and renting it out can have many benefits. 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 want the job. If you’re ready to buy a multifamily property, start the initial mortgage approval process today. We’ll walk you through the steps to ensure you’re getting the best loan for your real estate investment.

Get approved to buy a home.

Rocket Mortgage® lets you get to house hunting sooner.

Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.