Multi-family homes: Must know things before investing
A multifamily home is a residential property containing more than one housing unit. Some common examples include duplexes, town-homes, condominiums, and apartment complexes.
The multifamily units occupied by the families are known as owner-occupied properties.
Multifamily homes are one of the best ways to start investing in the real estate market. New investors usually buy these properties to generate passive income by renting out units of the multifamily property. However, multi-family homes have some challenges that other properties don’t have. If you are considering purchasing a multifamily home, read this article before jumping in.
Factors to consider before investing
Most people begin their search by locating a potential property. Then, they compare purchase prices, rental estimates, short and long-term costs. However, investing in a multifamily property requires much more than casual browsing for real estate. Along with finding the right property, you need to ensure a quality deal.
To make it simpler for you, we have prepared a checklist of key factors that you can consider before investing in a multifamily investment deal.
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Research the market
If you are new to investment, this tip is crucial for you. People believe that investing in a multifamily property lowers the risk of negative cash flow. However, it all depends on the housing market.
You can follow these steps to find out the right property in the market:
- Research economic and job trends.
- Check out the performance of the properties since Class A and B have been performing well in recent times.
- Look at the demographic profile to find out about factors like growing population that greatly affect the housing rates. For example, if the population grows by 1%, housing price is likely to increase by 1.4%
- Check on some factors like crime rates, public transportation, walk score, and cost of living.
- Check the multi family real estate data to find average rental income, multi family cap rate, etc.
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Location
It is one of the most important factors for real estate investors as it is one of the desired criteria to attract tenants. While searching for a multifamily home, look for high-growth areas where properties are in high demand, and the neighborhood is well-connected.
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Total Number of Units
The next step is the evaluation of the property. You must consider the number of units on the property and the number of rooms in each unit. If you are a beginner investor, then start your real estate search with the following three types of multifamily properties – the duplex has two units, a triplex that has three units, and a four-plex that has four units. These properties are generally more affordable for beginner investors and offer the most with the least risk.
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Potential Income
Next, you need to determine the income your property can generate. You can consult online sources to verify rental prices and income by taking some factors into consideration. There would also be maintenance expenses, taxes, etc. Beginners can try spending 50% of the investment income on expenses. This strategy might not work for everyone, but is generally a good rule for new investors.
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Financing your property
You may encounter different situations while financing your multifamily property. In some cases, investors choose to live in one of the units while renting out others. It allows them to qualify for owner-occupied financing and adds the second unit’s income to the lender’s qualifying ratio. Also, consider your credit score while looking for financing options. It greatly influences the qualifying process and is one of the important components a lender considers.
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Negotiating a better deal
The price of any property can vary greatly depending on the seller. You must understand the person’s intentions before dealing with him. Additionally, you must know that bank-owned properties are dealt differently than sale-by-owner properties. If you encounter such situations, there is a potential for cost savings.
You can also ask for seller concessions to work out a better deal for yourself. Anything from paying for closing costs to asking for home warranty coverage from top companies is up for negotiation.
Pros and cons of investing in Multifamily Homes
Pros:
- Multifamily homes consist of more units which means more income. You have the advantage to produce additional income or retirement savings only from one investment and save it for various purposes.
- Multifamily homes offer great tax benefits to investors.
- It is an ideal option for multi-generational families.
Cons:
- Multifamily homes are more expensive than single-family homes since you are buying a property that has more than one unit.
- If you rent out your other units, you need to commit time as a landlord. Living close to your tenants means you can get knocks on your door any time. You will be responsible for their unit’s maintenance and repairs. So, you need to make sure that you are comfortable with such situations, and with screening your tenants, negotiating lease terms, noise issues, or damage to the property and other responsibilities.
You could hire a property manager to look after the property and other tasks related to it, but you’d have to pay monthly charges to him. - If you want to sell your property in future, dealing with tenants can be complicated. You will need to coordinate with them and keep them apprised of the process.
Bottom Line
You need to invest a considerable amount of effort and time if you plan to purchase multifamily homes. Thus, it’s important that you understand the ins and outs of these properties. Consider the factors that we have discussed so far and make sure you use them wisely. If done right, this investment can result in a great wealth-building tool for you.
