What is a multifamily home and is it right for you?

If you’re looking to get started as a real estate investor and considering different types of housing, a multifamily home can be a great way to generate passive income. Multifamily properties are in high demand primarily because they offer many potential financial benefits.

Let’s walk through what a multifamily home is and look at some pros and cons of using one as an investment property.

The quick answer: What is multifamily home?

A multifamily home is any residential property with more than one housing unit. A duplex, townhome or apartment complex is a good example of a multifamily home. And if the owner lives in one of the units, it’s considered an owner-occupied property.

Types of multifamily homes

You can finance many multifamily properties with a traditional mortgage, but some require a commercial loan. While Rocket Mortgage® doesn’t offer commercial loans, we can help you get a standard mortgage loan to purchase a two- to four-unit multifamily property.

Single-family vs. multifamily home investing

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

• Price: The biggest difference is the price. A single-family home is usually less expensive and may be more accessible to new real estate investors.
• Mortgage: Depending on the type of building you’re interested in, you may need a commercial real estate loan to purchase a multifamily property. Most lenders will require a 20% down payment, especially if you’re new to real estate investing. While Rocket Mortgage doesn’t offer commercial loans, we offer financing for multifamily properties with up to four units.
• Risk: Single-family homes are typically easier to sell than multifamily properties. If you recognize early on that your investment in a single-family property isn’t the right path for you, you can sell it.
• Scalability: It’s easier to scale and earn a higher monthly cash flow with a multifamily property than a single-family house. A multifamily property is more conducive to house hacking, a strategy that involves a property owner living in one of the housing units while renting the others out.

The pros and cons of a multifamily home

Investing in multifamily homes has advantages and disadvantages. The first thing a potential investor should do is to confirm that this type of property fits their budget and needs. Let’s look at other pros and cons investors should consider.

Pros of a multifamily home

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

• More cash flow: You can use the money you earn from rental income to help pay your mortgage and housing costs. Over time, a multifamily property may supply an extra income stream.
• Larger pool of tenants: Purchasing a multifamily home gives you more units to work with, providing a larger pool of tenants to choose from. It increases your chances of finding qualified tenants and can make it easier to recover your upfront investment.
• More control over property value and repairs: If you live in one of the units, you’ll have more control over property value and repairs. It should be easier to catch problems and address them as soon as they pop up.
• Expanded investment portfolio: A multifamily home can expand your real estate investment portfolio. You can earn even more from the property if you choose not to live there and rent out all the
• More tax benefits: Owning multifamily housing offers many tax benefits. You can write off most repairs and the interest you pay on your mortgage as business expenses.

Cons of a multifamily home

Like any rental property, a multifamily home has its downsides. Here are the main ones to consider:

• Landlord maintenance demands: Becoming a landlord is a big commitment and shouldn’t be taken lightly. If you live in one of the units of your multifamily property, tenants may knock on your door at all hours of the day (and night) asking you to fix something.
• Larger purchase price: Buying a multifamily home is more expensive than buying a single-family home. If you used each as an investment property, you'd make more money with the multifamily property because you'd have more tenants.
• Responsible for all repairs: The property may need a lot of work. And even if it doesn’t, you’ll still be responsible for all repairs.

Financing options for multifamily homes

Multifamily properties may qualify for various types of mortgage loans, including conventional, government-backed, and commercial loans, depending on the number of units and purpose of the property. For properties with less than five units, traditional financing is typically available, while those with five or more units will likely require a commercial real estate loan. Here are some financing options:

• Conventional loans
• FHA loans
• VA loans
• Real estate investment loans

What to look for when buying a multifamily home

Specific characteristics of multifamily housing make the property type a good investment. Potential investors should consult a qualified real estate agent before purchasing a multifamily property.

Here are some features you should factor into your decision:

1. The location of property

A property's location will be one of the primary factors influencing how easy it is to find tenants. It will also help determine what you can charge in rent. Do your research to find a property in a desirable location.

2. The estimated rental income

What can you realistically earn in rental income? Do the math and determine how much you need to earn to pay the mortgage, finance repairs, etc. Calculating the return on investment (ROI) will help you figure out how much you can spend on an investment property.

3. The number of units

The more units in the multifamily property, the more tenants you’ll have. You’ll need to strike a balance between the right number of units for your budget and what you want to earn. Factor in the costs, time and effort you’ll need to pour into maintenance.

4. The seller on the multifamily property

Get acquainted with the person selling the property. Do they have a history of taking care of the property? Research the owner and the property to ensure the residence meets your standards. Schedule a home inspection to understand the property’s condition. An inspection can help you avoid paying for costly repairs after purchasing the property.

The bottom line: Multifamily homes make great investments

Buying a multifamily property and renting it out can offer many benefits. It’s a great way to get started as a real estate investor – and you can live in one of the units yourself.

But it will require a lot of time and resources. So make sure you’re up for 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 get the right loan for your real estate investment.