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Buying a home in a competitive market can sometimes mean thinking outside the box. Choosing a multifamily property can offer an alternative path to homeownership if you’re ready to leave renting behind. But what is a multifamily home, and should you consider it?

What is the difference between single and multifamily homes?

The answer is in the name. A single-family home houses just one family. It’s a free-standing structure containing one kitchen, one or more bathrooms, one or more bedrooms and a main living area.

Multifamily homes have more than one unit (which may share walls with another) that accommodate several families or individuals. Each has its own unique address, as well as a kitchen, bathroom, living room, one or more bedrooms, and a separate entrance.

What is an example of a multifamily home?

Multifamily housing comes in all different shapes and sizes, including:

Duplex

Duplexes have two units, each with its own entrance. A common wall separates the two, and each side has a floorplan that’s like a single-family property. Porches or backyards may be partitioned so that each unit has its own outdoor space.

Triplex

A triplex is similar to a duplex, with one key difference: It consists of three units instead of two. The middle unit shares walls with the units on both ends. Triplexes can offer private living space and communal space, such as a porch or yard area.

Quadplex

A quadplex is multifamily housing with four units. Quadplexes can use different layouts, in terms of how the units are ordered and the floor plans for each one. For example, units may be arranged in a row side by side or leveled, with two units on the bottom and two on top. Regardless of the arrangement, the units in a quadplex have one or more shared walls and they may also share outdoor space as well.

Apartments

Apartments have multiple units and the people who live in them may have neighbors on each side, above and below. Each unit has its own kitchen, bathroom and living space, and shares multiple areas (laundry room, gym, etc.).

For an apartment to be considered a multifamily home, it must have four or fewer units. One person can own a multi-unit apartment building and rent three units out while living in the fourth.

If an apartment building has five or more units, it’s generally considered to be a commercial property, not a multifamily home.

What are the benefits and potential drawbacks of multifamily homes?

Buying a multifamily home isn’t necessarily right for everyone. Whether it makes sense for you can depend on your goals and what you can afford.

Benefits of investing in a multifamily home

Purchasing a multifamily home could make it easier for you to become a homeowner. You could buy a multifamily home and live in one unit while renting the others out for rental income, generating passive income on a regular basis. This rental income you earn can help to cover some or all your homeownership costs (mortgage, utilities, etc.) each month. Depending on how much you’re able to charge, it’s possible you may pay little to nothing out of pocket for the property.

Investing in real estate can help you diversify your portfolio to offset market volatility and hedge against rising inflation. If you’re already investing in stocks, mutual funds, bonds or even cryptocurrency, real estate can add another piece to your risk management pie. You can buy a multifamily property and hold on to it for decades, reaping the benefits of rental income even through changing market environments. For instance, when consumer prices rise, property values may move in tandem. If there’s increased demand for rental properties, landlords can charge more for the units they own.

Multifamily homes can also generate tax benefits. While you do have to report rental income on your tax return, you can deduct certain expenses, such as depreciation, maintenance costs and property management fees if you outsource the work to a third-party company.

The drawbacks of investing in a multifamily home

One of the biggest disadvantages of multifamily housing is the cost. A more expensive property can mean a higher mortgage payment. If you can’t find tenants to occupy each unit, then you’re on the hook for the entire amount.

A larger property potentially means higher maintenance expenses, too. You’ll generally need to have more cash in reserves to handle any unexpected costs that may come along. For example, if your HVAC system conks out, it could cost you $5,000 or more to replace.

In terms of getting approved for a mortgage loan, you may have to meet stricter requirements, like previous experience with property investing. Additionally, your lender might have a lower limit on your loan-to-value ratio (LTV). That’s the amount you’re borrowing in relation to the property’s value. (To calculate LTV, divide the loan amount by the appraisal value.) You might pay a higher interest rate when purchasing a multifamily property, too.

Who are multifamily properties for?

These dwellings could be right for first-time homebuyers or investors who are interested in owning a multi-unit home. You might consider a multifamily property if you:

  • Are having trouble finding a single-family home in a competitive market
  • Want to try your hand at house hacking and plan to live in one of the units
  • Are interested in sharing a property with relatives or friends
  • Want to generate passive rental income
  • Would like to diversify your investment portfolio to hedge against inflation and/or stock market volatility
  • Meet the basic qualification requirements for a multifamily mortgage loan

You may want to think twice about a multifamily property if you’d like more space between yourself and your neighbors (i.e., no shared walls), aren’t sure how much time or money you’ll be able to commit to maintenance and upkeep or fall short of a lender’s credit score, income or asset requirements.

How do you start investing in multifamily housing?

The first step is to decide what type of property you’re most interested in. Duplex or triplex? Quadplex or apartment building? Then consider if you want to live in one of the units. Your answer can help determine how much rental income you’ll be able to generate.

Next, think about how much you can afford to spend and how large of a loan you’ll need to purchase a property. Compare lenders, like Ally Home, to get an idea of how multifamily loans work and what kind of qualifications you need to meet for approval.

Lastly, start looking for suitable properties. An experienced real estate agent can help you get a better sense of the local rental market, what properties are selling for and how much rent you might be able to charge.

What are multifamily loans and are they easy to get?

Multifamily loans are mortgage loans that are designed for purchasing or refinancing multifamily properties. If interested, you have different options, including:

  • Conventional mortgages, which may offer 15- or 30-year terms and have fixed or adjustable interest rates.
  • Government-backed loans, such as loans offered by Fannie Mae and Freddie Mac. These loans can have fixed or variable rates. Down payment requirements may be lower than conventional loans.
  • Portfolio loans, which are designed for purchasing multiple multifamily housing units at the same time. If you’re a beginning real estate investor, it’s unlikely that you’d use this type of loan to purchase a property.
  • Hard money loans – not offered by traditional lenders – are short-term loans secured by real estate rather than to credit worthiness. They’re often used when flipping properties, as they typically hold a term for 12 to 36 months, require much larger down payments than conventional loans and generally come with interest rates between 8 and 15%.

Run the numbers before you buy

If you’re considering a multifamily home, it’s important to look at all the costs involved to make sure it’s affordable. You need to be sure you can qualify for the loan and afford the payments if, for some reason, you’re not able to rent it out right away. Finding the right lender also matters. Take time to compare loan options so you can find the best rate, which will save you money on interest over the long term.

 

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