Investing in Multi-Family Homes

A Story by Sara Griffin | Updated 04/10/2020 12:00pm


Multi-family homes can be a great way for novice real estate investors to get started buying properties that will generate passive income. However, it is important to be aware of several challenges that may arise with multi-family homes that single-family homes don't have. My name is Sara Griffin with The Associates Realty Group. Here's a quick breakdown of what you need to know. 
 
What is a multi-family home?
From duplexes, which have two dwellings within a single building, to homes or small apartment buildings with up to four units, a multi-family home is a single building that is set up to accommodate more than one family living separately. Buildings with more than four units are considered commercial properties. 
 
The owner of a multi-family home can choose to either live in one of their units and rent out the other(s) or alternatively live on another property and rent them all out. If you do not live in the property, you're considered an investor which means different rules for getting a mortgage will apply. 
 
What’s the difference between a single-family home and a multi-family home?
While you can rent out some or all of a single-family home, multi-family homes have some characteristics that you won’t find in a traditional house. For example, each unit in a multi-family home has a different address, their own kitchens and bathrooms, and most likely their own entrances.

When purchasing a multi-family home, there are certain things you should consider that you wouldn't have to with a single-family home such as the needs of your tenants, the kinds of income the property will produce, as well as what your expenses will be. Some multi-family homes started out as large single-family homes that an owner or developer decided to divide into more than one property. Those living in multi-family homes may have less privacy than those living in single-family homes because of shared walls. If you're purchasing a multi-family home, you may be able to use the projected rental income from the property to help you qualify for a mortgage and you may also qualify for a higher loan amount.
 
Pros of Living in a Multi-Family Home
  1. Extra Income: The income the property earns from renters can help offset the cost of your mortgage and other housing expenses, providing you with an income stream. 
  2. Repairs: If you live in or close to your rental property, it’s less likely that you’ll miss major issues and you’ll be able to respond faster when problems arise.
  3. Write-Offs: You can write off much of your home maintenance as a business expense and pro-rate part of your mortgage interest payments.
  4. Multi-Generational: Living in a multi-family home could be an ideal option for multi-generational families who want to be close but retain their privacy (or helps you keep the option open in the future).
  5. Income-Producing Investment: If you ultimately move out of the property and into your own home, you can still keep it as an income-producing investment, earning even more once you start renting out your own former unit.
Cons of Living in a Multi-Family Home
  1. Upfront Costs: Purchasing a multi-family home may cost more upfront than it would to buy a single-family home.
  2. Responsibilities of a Landlord: Living in the immediate vicinity of your tenants means you may get knocks on your door at any time for questions about maintenance or repairs. You’ll also need to make sure that you’re comfortable negotiating lease terms and screening your tenants. Furthermore, you need to be able to deal with tenants in a business-like way when the rent is overdue, there are issues with noise or there’s damage to the property, to name but a few of the problems that landlords face.
  3. Potential Financial Risks: If your units go vacant or a tenant is late with the rent, you’re still responsible for paying your mortgage. You also have to cover the cost of (quickly) repairing problems like a leaky roof or clogged toilet. 
  4. Emergency Fund Required: The more units you have, the less impact an individual unit will have on your overall cash flow, but landlords should have an emergency fund set aside to cover unexpected repairs as well as rent on vacant units.
  5. Harder to Sell with Tenants: It can be more complicated to sell a multi-family property that has tenants since you’ll need to coordinate showings and appraisals — and keep the tenants aware of the process.
Maximizing Returns on a Multi-Family Home
In most cases, a multi-family home will also serve as an investment property for the owner. It’s important to understand the costs associated with the property, including not only your mortgage, property taxes and homeowner's insurance, but also other expenses such as utilities, REALTOR®, advertising, and legal fees.

If you're interested in getting into real estate investing and are comfortable with the added responsibility and time commitment that comes with being a landlord, then purchasing a multi-family home may be a good fit for you. They can also be a smart choice for multi-generational families interested in buying a property together while having their own dedicated space. My name is Sara Griffin with The Associates Realty Group and it's my goal to not only help you buy or sell real estate but to be your REALTOR® for life. If you have any questions about buying or selling a multi-family home, feel free to call me at 951-220-4491 or email me directly at sarapassion4sales@gmail.com.
 
 

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