Should You Invest in a Multifamily Home?
If you are investing in real estate, a multi-family home can diversify your investment portfolio and help generate better income for you than a single-family unit. Overall, it can be a lucrative and rewarding property to own, but like with all investments, it is not without its drawbacks. There are some things to keep in mind before you buy your first multi-family property.
Financial Costs
When you find a multi-family property you are interested in, sit down and do the math to determine how much you can make from that property as the owner. You can do this by finding the difference between expenses you would have — covering maintenance and repairs — and how much you expect from your income from your tenants. If you do not have access to all of this information, you can use the 50 percent rule, where you take your expected income and divide it in half; make that your expected expenses. Now you have your anticipated operating income.
A multi-family unit can cost more upfront than a single-family home, and it can take a little longer to sell. The income is not necessarily steady, since there can be extended vacancies, and since some people do not treat a rental property as well as an owned home, you may have some bigger costs when tenants move out.
Your First Investment
If this is your first real estate investment, one thing that is often recommended is buying a multi-family unit and living in one while you rent out the rest of them; this is called house hacking. One benefit of this is that the rent from the other units should cover your entire mortgage as well as some of your property taxes and other expenses. You can get better financing options if you are going to be using a unit of the property as your primary residence, including a lower interest rate and down payment.
Your standard multi-family home that is not a larger complex is usually a duplex, triplex, or a quadplex (sometimes called a four-plex), with two, three, and four units, respectively. If you are buying a property with more than five units, anything with five or more units is considered commercial real estate and the better financing options will not be available for larger properties like this.
Drawbacks to House Hacking
While living in a unit and renting the others out can come with certain advantages, it is important to keep in mind that your tenants will be living right alongside you, which can lead to headaches. Being a landlord takes a considerable amount of patience and some DIY skills to make repairs. You can always hire a property management company to handle everything for you and choose not to share with your tenants that you are the landlord, but that can be a hassle on its own.
You will also risk that there will be times when your property sits vacant, which can become a money pit for you. Late rent payments and evictions can also be a hassle when you are right next door to your tenants.