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What Is a Multifamily Home and Should You Invest in One?

Multifamily investing comes with some pros and cons. Learn what they are to determine if multifamily investing is right for you.

Apr 22, 2021 by Laura Agadoni
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Before learning what a multifamily home is, understand what it isn't. A multifamily home isn't what it sounds like: multiple families living in the same house. In both the legal and real estate investing worlds, a multifamily property refers to a building that houses two, three, or four separate households.

Five or more households makes a building commercial property rather than a multifamily home. Commercial real estate is a different investment class than residential property, and as such, it's usually financed differently: The terms are usually shorter, which calls for higher monthly payments, which in turn eats into your cash flow. A real estate investor typically finances a multifamily home, however, the same way they finance a single-family home.

A multifamily home can be a duplex, triplex, or fourplex. A multifamily building can consist of two, three, or four apartments, townhouses, or condo units. Each household, whatever type it is, must have at least a kitchen, bathroom, bedroom or living space, and a separate entrance. Having separate utility meters for each household is best; otherwise, you must figure a way to divide the cost of utilities between tenants.

Now that you understand what a multifamily home is, the question is should you invest in one?

Getting started

Many investors who buy and hold real estate to become landlords buy single-family homes. Why? Many investors have lived in a single-family home, so they understand, at least to a certain degree, what they're getting into. Plus -- and this is a big plus -- single-family homes usually require less capital to get into than multifamily real estate. Therefore, it's generally easier to get started in real estate by investing in single-family homes.

Multifamily investing is popular, and although some investors start with a multifamily home, many investors consider multifamily investing the next step after investing in single-family homes.

Better rent potential and cash flow with multifamily

The main reason investors like multifamily investing is the potential rental income involved: You're likely to collect more rent with a multifamily home than with a single-family home. You'd be collecting monthly income from multiple tenants, not just one tenant, from one multifamily investment.

Less vacancy risk with multifamily

Vacancies happen during tenant turnover, and when a rental property sits vacant, no rent money is coming in. If one tenant moves (or is evicted) from a multifamily building, you'd still have one or more tenants paying rent, meaning you'd still have an income stream -- not so with a single-family home where you'd collect nothing during a vacancy period.

Better mortgage interest rate potential

Investment loans, such as the loan you'd get when buying an investment property, typically have higher interest rates than loans for primary residences. Multifamily investors can get a primary residence mortgage loan, however, even if they rent out multifamily property. How? They just need to live in one of the units themselves.

Beginning investors often look for duplexes. The cost of entry is usually not much more than it would be with a single-family home and usually lower than it would be with a larger building. Beginning investors with a duplex can live on one side of the duplex and rent the other. Usually, investors need to live in the property for only a year before they can then move and rent out the entire property, but this varies, depending on the mortgage lender.

The lending process is streamlined

Let's say you have the choice of buying one multifamily property with four units or buying four single-family homes. To get financing for the multifamily would require just one loan, but you'd need to get four separate loans to buy the four single-family homes. The process of getting a loan can be time-consuming, and you might not be approved for four loans at once, so having only one loan to deal with is advantageous. Plus, you'd have only one mortgage payment with a multifamily building.

The level of difficulty is greater with multifamily

A drawback for beginning investors getting into multifamily investing is that the more tenants you have, the more issues can arise. It can be overwhelming to learn to manage multiple tenants when you've never been a landlord before.

You'll need to be aware of the landlord-tenant laws for your state and federal landlord-tenant law. You'll also need to have a system in place for screening tenants and collecting rent. And with a multifamily property, you'll be in charge of repairs and maintenance for multiple households, not just one. Making an error with one tenant isn't great, but it's more manageable than making the same error with multiple tenants.

You're competing with savvy investors

Many investors of multifamily property are seasoned investors who might have started with single-family homes and are now ready to branch out. They likely have a higher experience level than you would when buying your first investment property. Seasoned investors might also be cash buyers, meaning you might lose out on some deals to those more experienced investors. Note that this can happen with the single-family market as well. And with the single-family market, you'd also be competing with primary homebuyers.

Property management might be necessary

The more tenants you have, the more time-consuming the job. There is a solution: hiring a property manager. But that can be problematic. For one, many property managers don't do a great job, and you might find yourself managing the property manager. Even if your property manager does a good job, it's not free. The money you pay a property manager cuts into your bottom line.

The Millionacres bottom line

Investing in multifamily property can be a lucrative career. There are many advantages to multifamily investing, but there are some drawbacks as well, mainly the cost of entry. If you want to invest in multifamily property, just as with anything in life, learn as much as you can, especially about financing and managing your property and your tenants. The more prepared you are, the more successful you should be.

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