6 Pros & Cons of Investing in Multi-Family Properties: What to Know About Multi-Unit Homes

Pros and Cons of Investing in Mult-Family Homes

Buying a multi-family property can be a lucrative investment, and while there are numerous benefits to this type of investment, there are a few potential drawbacks. Investors will need to understand their loan options, tax implications, how to handle tenants, and decide whether or not they want to live on the property. We'll cover these topics to help buyers understand the implications of investing in multi-family homes.

What Is a Multi-Family Home?

Multi-family homes are single buildings that are divided to accommodate more than one household living separately. Converting a single-family home into a duplex is all it takes to turn a homeowner into a multi-family real estate investor! These properties can include duplexes, triplexes, and quadplexes and still qualify as residential real estate. Small apartment buildings or multi-family homes with more than four units are considered commercial real estate.

Multi-family homeowners can live in one unit and rent the others out. Those wanting to take a hands-off approach may choose to live off-property. However, the financing rules for multi-family properties will differ depending on whether owners choose to live onsite or not. Owners who don't plan to live there are considered investors and can act as landlords or hire a property management company.

The Benefits of Multi-Family Homes

Let's explore some of the perks of investing in multi-family properties.

Owner Occupiers May Be Eligible for an FHA Loan

For investors who plan to be occupants of the property they're buying, the Federal Housing Administration (FHA) has a mortgage program that might be optimal for some buyers. The traditional FHA mortgage program allows house-hunting buyers to purchase homes with up to four units.

These loans have several benefits. A buyer can qualify for an FHA loan with a credit score as low as 500 and a debt-to-income ratio above 50 percent. Borrowers can add a co-borrower's income to gain approval, even if they won't reside in the property.

Other perks include lower interest rates and the ability to make a down payment of as little as 3.5 percent for a multi-family loan. Mortgage insurance premiums must be paid initially and will be an expense for 11 years. Should buyers make less than a 10 percent down payment, they will pay mortgage insurance premiums for the life of the loan.

Scalable Growth

Investors aspiring to expand their real estate investment portfolio can quickly scale up from their first multi-family housing purchase. However, there are a few key ways to see scalable growth sooner rather than later.

The government allows multi-family property buyers to write off certain expenses associated with the units in the property and deduct those costs from their total taxable rental income. These typically include:

  • Maintenance
  • Repairs
  • Depreciation

Depreciation allows property owners to "expense" a portion of the structure's value annually to account for its deterioration. This expense serves to reduce the multi-family property's net operating income. In turn, it reduces tax liability.

Owners can force appreciation to grow these investments in their portfolio in two ways: collect more rent and decrease expenses. When investors see a net positive result from these actions, they successfully force appreciation. Another approach to achieving this goal is to provide additional "paid" services on the property and collect more fees to boost income. Conversely, owners can remove amenities to reduce overall maintenance costs if they aren't being used or are in disrepair.

Investors can also apply for a home equity line of credit (HELOC) to help cover the down payment on a property. However, these funds can also be used to make repairs and upgrades to the property, which can boost overall value.

Reliable Cash Flow

A Multi-Family Home Means More Tenants to Pay Rent

With multiple tenants under a lease, owners can enjoy a steady and reliable influx of cash: the more tenants are in place, the better. Should a vacancy arise, the other occupancies can help minimize any loss of income while looking for a new tenant. This isn't a possibility with a single-family home rental.

Buyers should ensure that tenants pay rent amounts marginally above the actual expenses associated with owning and maintaining the property. This approach ensures that investors will see higher profits in a multi-family home versus a single-family home.

Drawbacks of Multi-Family Real Estate

With the advantages covered, let's discuss a few potential drawbacks to owning a multi-family property.

Lack of Privacy as a Landlord

Owners who choose to live on the property and serve as a landlord may face some challenges. Tenants will know that the owner lives there and could just pop by and knock on the door anytime. This could certainly feel like an invasion of privacy, so owners need to have set contact hours and enforce them with tenants, save for incidents of emergencies.

Each unit on the property will increase the owner's management responsibilities. There will be multiple tenants to manage concerning collecting rent, fixing appliances, scheduling repairs, and doing periodic inspections.

Need for Experience

Due to the advantages of investing in multi-family homes, these are highly competitive investments, so having some experience or a mentor is a benefit. Knowing how to find tenants and price units appropriately is essential to see greater profits.

Multi-family units can be more complicated than single-family homes, so owners might experience a few unusual occurrences. There are several types of complications that can crop up. For example, an unruly or noisy tenant can result in all tenants suffering, which could drive down property values considerably. Owners need to know how to contend with any incident that can arise.

Expenses Add Up Fast

More units equate to higher expenses, and this can be difficult as you decide how many units your building should have. Not only will utility bills be higher for common-use areas, but maintenance costs will increase, too. The higher the property is valued, the higher the property taxes and mortgage insurance will be. Also, owners must consider any costs associated with advertising the property or real estate agent fees if they are screening and securing tenants.

Investing In Multi-Family Homes Can Be Profitable

Multi-family homes can be highly profitable and may be easier to manage than investing in multiple single-family homes. However, this type of investment can also be more complicated and challenging. Consider mitigating some of the risks of managing your property, reducing the effort and stress of being a landlord by investing in a property management service.

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