So you are thinking of investing in real estate. Whether you dream of becoming the next real estate mogul or just want a duplex to help pay your mortgage, there are plenty of compelling reasons why you might want to target a particular type of property: the multi-family home. .
As the name suggests, multi-family homes house more than one group of people in a single building or complex (as opposed to a single-family home). They offer a lot of potential for income and property appreciation, but there is also more liability and risk
Let’s take a look at how investing in multi-family homes works, along with the pros and cons.
What are multi-family homes?
Multi-family houses consist of several separate housing units under the same roof or complex. Each unit has a unique address with an entrance and living areas separated from the others. There are many different households/tenants, but only one building owner, who can be an individual or a legal entity.
According to the latest data from the US Census Bureau, multi-family homes make up over 30% of housing in the United States, so there is plenty of potential for growth and investment opportunities. For the investor, these types of homes are income-generating, providing stable cash flow through rents paid by tenants. There is also the potential for real estate to appreciate in value over the years.
Types of Multi-Family Homes
Multi-family homes come in a wide variety, with the number of units ranging from two to 2,000. The different types of multi-family homes you can invest in include:
- Duplextriplexes and quadruplexes. These properties have two, three or four units respectively. You may be able to “hack home» this type of property by living in one unit and renting out the others. Often these qualify for regular mortgages or homeowner financing.
- Apartments. Apartment towers have multiple units and belong to a single entity. Management is usually on site. You will need a commercial loan to finance this type of property.
- Condominiums. Condos often look like apartments, although they can also take the form of townhouses or townhouses. Unlike apartments, which tend to be rentals, condos are individually owned, although common areas are shared and managed by a owners association (composed of condo residents).
- Mixed use. A multi-family mixed-use unit combines housing with retail, commercial, entertainment, or cultural space.
- Student housing. Built near universities, these complexes are designed to meet the needs of students.
- Restricted by age. Typically, these types of multi-family homes limit occupancy to people age 55 and older. Buildings, amenities, features and activities are geared towards people in this age group.
- Limited income. Subsidized housing helps low-income people afford housing. The federal government often works with developers to build these units. You may be able to accept Federal Housing Choice Bonds if you invest in this type of property.
Invest in multi-family homes
Investing in multifamily properties – known as multifamily investing – is not for the weak, nor is it passive. It’s a lot of work, and there are some important things you’ll need to consider before investing your hard-earned cash in a multifamily property.
One key thing to know, first of all: multi-family homes can be considered either Residential Where commercial real estate. Small multi-family homes, those with four units or less, are classified as residential properties; commercial multifamily property has five or more units. The difference can be significant when it comes to funding.
How to finance a multi-family property
Financing a multifamily property depends on how many units there are in the property you are buying.
For four units or less, you may be able to finance the property by single family Home with a traditional loan. That means mortgage market officials Fannie Mae and Freddie Mac will back, and possibly buy, the loan, ultimately making it cheaper to offer lenders. You may also be able to fund it with a FHA loanmeaning you can deposit less money than the conventional 20% required by most private lenders.
If the property you want to buy has five or more units, however, you will need a business loan. Commercial mortgages have different terms than residential mortgages. They tend to run shorter, for one thing. In addition, the lender will take into account projected rental income taking into account the amount they are willing to lend you, as well as the interest rates they will offer you.
Management
Proper management of a rental property is essential. But with multiple units comes a lot more responsibility. Although this will reduce your profits, you may want to hire a professional property manager to oversee things, and – unless you’re good with your hands – and a superintendent or maintenance staff member on site. At the very least, you may want an accountant to keep the books.
Insurance and taxes
Multi-family properties will lead to higher costs everywhere – and that includes owner insurance and property taxes. But while you should be prepared for a higher tax bill, there are also more opportunities to offset taxes with multifamily properties.
“Taxes are another big reason why people should invest in multifamily housing,” says Ryan Pineda, real estate investor and CEO of Tykes. “There are opportunities to separate costs, bonus depreciation and rezoning to significantly increase value.”
Zoning by-law
Zoning by-law will determine where properties can be located and what you can do with them. Zoning laws will allow multi-family properties in some areas of the city and not others. You’ll also want to keep zoning ordinances in mind if you’re considering converting a property (such as apartments to condos or commercial properties to residential housing).
Reasons to Invest in Multifamily Real Estate
Multifamily real estate offers distinct advantages over other types of investment properties.
Generate income
Multifamily properties are built for cash flow. The space in each unit is used as efficiently as possible to attract more tenants and more profit. They can offer much more income than renting a single family home.
Build your real estate portfolio faster
If you are looking to become a serious real estate investor, multi-family properties could allow you to accumulate a large number of units more efficiently.
“You have the ability to invest in larger deals and acquire more units quickly, which makes management much easier,” says Pineda. “Instead of having to buy and repair 30 single-family homes and manage 30 different loans, you make a purchase of a multi-family property with 30 or even 300 units in one transaction.”
Strategically increase property value
Multifamily ownership also offers investors the opportunity for capital appreciation, should they ever decide to sell. “Multi-family properties are great investments since the value of the property is based on the net operating income you have, not the sale price of the neighboring apartment,” says Pineda. “You are rewarded for the money you can make and there are strategic ways to be creative to generate income and increase property value, such as reducing vacancy, increasing rents or improving the property. “
Lower your cost of living
Investors in multifamily properties with four or fewer units often live in one of the units, which qualifies them for homeowner financing (which is similar to a regular residential mortgage and comes with a lower interest rate) . And of course, they don’t pay rent (or pay it to themselves).
Less risk than other investments
Multifamily properties generally offer investors stable cash flow and less risk, even during economic downturns. People still need a place to live, after all. Other types of real estatesuch as industrial, commercial and office spaces, carry more risk, as recessions affect them more deeply.
Multi-Family Properties vs Single-Family Properties
If you are considering residential real estate, the great alternative to investing in multi-family properties is invest in single-family homes. Obviously, the multi-family option is more complex than the single-family one, but there are also greater rewards. Here is an overview of the advantages and disadvantages of each property category.
Single-family homes
| Advantages | The inconvenients |
|---|---|
| Easier for novice investors | Not as much rental income potential |
| Fewer tenants to manage | Spread nature of properties (if more than one house is owned) |
| Strong upside potential | More competition for properties |
| Loans are easier to get | Potential waste of time dealing with tenant issues |
| A larger pool of buyers when you’re ready to sell | Income concentrated in one tenant/property |
| Renters tend to stay longer |
Multi-family houses
| Advantages | The inconvenients |
|---|---|
| Higher earning potential; stable income stream | Requires more capital to invest |
| Can offer a place to live as well as an investment | Higher maintenance costs/expenses |
| You can benefit from a mortgage loan, constitute a capital with the rents perceived | Requires a commercial loan (properties with 5+ units) |
| Increase property value by increasing income | May be more difficult to find buyers |
| Less competition for properties |
Final Word on Investing in Multi-Family Homes
Investing in multi-family real estate offers an attractive way to expand your investment portfolio and generate income. But it takes a lot of money and an incredible amount of work. It’s best suited to “experienced investors, of course,” says John Antretter, a licensed agent for The Agency in New York. If you’re new to it, “better start small before you have multiple tenants to manage. A tenant would not be as overwhelming as being a landlord for many.
That said, if you have deep pockets and are willing to hire professional management help, you might want to seriously consider multifamily housing.