Multi-family homes can be a great way for novice real estate investors to get started. They’re also a popular option for extended families to live under one roof. However, these properties, which contain multiple units for more than one household, have some challenges that single-family homes don’t have.
If you’re considering buying a multi-family home, here’s what you need to know before jumping in.
Definition: What is a Multi-Family Home?
A multi-family home is a single building that’s divided to accommodate more than one family living separately. They can range from a duplex, which has two dwellings within a single building, to larger buildings with up to four individual units. (Buildings with more than four units are typically considered commercial properties.)
The owner of a multi-family home can either live in one of the units and rent out the others, or live elsewhere and rent them all out.
“When you’re looking at a single-family home, you’re thinking about your own needs only,” says Char Winckowski, a Realtor with Howard Hanna in Toledo, Ohio. “When you’re looking at a multi-family home, you have to think of it more as a business: What will the needs of your tenants be? What kinds of income will it produce, and what will your expenses be?”
Multi-Family vs. Single-Family Homes
While you can rent out some or all of a single-family home, multi-family homes have other distinct characteristics: Each unit in a multi-family home has its own address, its own kitchen and bathroom(s), and typically its own entrance. Some may have started out as large single-family homes that an owner or developer decided to divide into multiple units, while others are built specifically to contain more than one household.
Who Are They Best For?
These properties can be a smart choice for multi-generational families interested in buying a property together. For example, aging parents, college-age children, and other members of the extended family can all live under the same roof while still enjoying the privacy of individual units.
Purchasing a multi-family property is also great for those who are interested in getting into real estate investing to generate wealth—and are comfortable with the added responsibility and time commitment that comes with being a landlord. These types of homes can potentially allow you to live rent free, if you occupy one of the units and the rent from the other units generates enough income to cover your monthly expenses. Once the mortgage is covered, the rent from multi-family homes can become a passive stream of income.
Bear in mind, though, that the rules for financing a multi-family property are different depending on whether the owner will live there or not: If you don’t plan to live in your property, you’re considered an investor. And as such, it’s important to understand the costs associated with the property, including not only your mortgage, property taxes and homeowners insurance, but also other expenses, such as utilities, real estate agent fees, advertising (to attract tenants), and legal fees.
If you’re thinking of investing in a multi-family home, do your homework: “An evaluation of the property should include a home inspection by a licensed inspector and market research to include a market lease-rate analysis along with current market rental conditions,” says Paul Wyman, managing broker of the Wyman Group in Kokomo, Indiana.
Types of Multi-Family Homes
There are various kinds of multi-family homes to consider, with different offerings in terms of layout and living space.
- Duplex/triplex: A duplex refers to two units that are connected either via a common wall, ceiling or floor. A triplex has three. Each home has its own entrance and may also have separate yards and garages.
- Condo: A condo is typically an individually owned unit within a community or building made up of other individually owned units. In most cases, condo owners are required to pay monthly fees to a homeowners association. These fees cover the costs of upkeep for any amenities that may be included, and in some cases they cover insurance for the building or community, as well.
- Townhouse/semi-detached house: Similar to duplexes, these are homes that are attached to one another via a common wall. Usually they have two or three stories. They require less maintenance and upkeep than a single-family home, and they’re more affordable than freestanding homes as well.
