Understanding Multi-Family Homes: A Comprehensive Guide
While there are several options for you to choose as a real estate investor, it’d be best if you start with a multifamily property. A multifamily home is a great way to earn passive income, seeing as it’s in high demand due to its numerous potential financial benefits.
Multifamily properties are popular at the moment for several reasons. Firstly, they help you generate enough income to enable you to pay off a considerable chunk of your mortgage. What’s more? You can live in one unit and rent the rest out. Property management is also a bit more flexible under multifamily real estate seeing as the building generates enough income to hire a property manager.
What is a multifamily home, and how can you buy one? Read on to discover answers to these questions and the benefits of investing in multifamily real estate.
What’s a Multifamily Home?
Are you a new investor that wants to understand the multifamily definition? Here’s your answer. Multifamily homes are properties with more than a single unit to rent. These units come with their own bathroom and kitchen. Some examples of multifamily properties include large apartment complexes and buildings, duplexes, triplexes, quadplexes.
Types of Multi-Family Homes
Multifamily properties are classified by the number of units in each property. The following are types of multifamily property:
Apartment Complex
An apartment complex can be described as a single structure with five or more units. Tenants share common resources, such as playgrounds, parking garages, or swimming pools in apartment complexes.
Apartment buildings will always appear to be a large investment, but this does not have to be the case. If you are considering owning an apartment building, check out this guide.
Townhouse
Here, two families share one house divided by an interior wall. Both homes have their entrance, and the families buy their units separately. So suppose you’ve been asking, “Is a townhouse a multifamily house“? You have your answer now.
Duplex
A duplex comprises two dwellings placed side-by-side or a two-story building. While they may both share one front door, the entrances are separate.
Triplex
Also called three flats, triplexes are three-story configurations or three dwelling units situated next to each other.
Quadplex
Quadplexes comprise four dwellings. Property owners pay the electricity and water costs, then pass the other expenses to the tenant.
Multifamily Home Vs. Apartment
Sometimes new investors wish to know the difference between a multifamily home and an apartment, especially which one is more lucrative. Buying small multifamily homes, like duplexes and triplexes, offers unique benefits to investors that might be unavailable with apartment buildings.
The truth is, your financial goals are easily achievable with small multifamily properties regardless of your reason for venturing into residential real estate investment.
Multifamily Home Vs. Condo
Multifamily homes are commonly called apartment buildings (not all multifamily homes are apartments, though) and might have from two to 200 units. In contrast, condos are apartment units in buildings owned by different occupants or investors who either live in them or rent them out.
Thus, the only difference between a multifamily investment like a condo and an apartment is the ownership.
Multi-Family Rental Property Investment Tips
It’s not enough to get answers to the question “what is a multifamily home“? You’ll need expert tips, especially as a new investor.
Buying a single-family property is easier compared to acquiring a multifamily home due to some variables. For instance, each unit has different opportunities for adding value, tenants, and a set of appliances and fixtures.
The following are tips for finding the best multifamily properties:
Income Potential
When seeking multifamily properties to buy, conduct a realty check to ensure the seller’s words match the current market rents. You can use RENTCafé to discover what larger apartment owners charge for rent, while Rentometer enables you to compare your lease to similar properties in your neighborhood.
Most multifamily houses may offer additional opportunities for generating more incremental revenue streams, like security systems, high-speed internet service, premium covered parking, and coin-operated laundries, amongst others.
Seller Motivation
To ensure you get the best deal in a real estate transaction, you have to understand the seller’s hot button. Often, a seller’s motivation isn’t the price, and experienced investors know this trick.
The seller might need a quick escrow close to avoid a pre-foreclosure. In some cases, the seller might be experiencing a problematic tenant or a deferred maintenance issue the seller couldn’t afford.
The more you understand the seller’s reason for selling, the greater your chances of saving.
Location
Often, developers build the best multifamily properties near large apartment buildings. Apartment tenants might find renting a single-family house unaffordable. Therefore, they can easily switch from living in apartments to moving into a small multifamily property.
Other factors determining if a location is perfect for your multifamily investment include a high housing affordability index, a growing market, and a beautiful neighborhood to attract numerous potential tenants.
When you answer questions like “who are multifamily homes best for?” it helps you determine the best location for your multifamily investment.
Unit Count
Small unit multifamily properties like duplexes, triplexes, and quadplexes are a great way to venture into multifamily investing without the accompanying higher risk of buying larger apartment buildings.
More so, smaller multifamily unit counts are affordable to purchase and offer the most considerable upside potential amount.
Benefits of a Multifamily Home Investment
Multifamily investment is an ideal strategy to gain consistent cash flow and steady appreciation in market value. The following are the benefits of multifamily investing:
Easier to Increase Value
It’s difficult to increase a single-family house’s value unless you have a high-risk fixing-and-flipping strategy. The reason is that owner-occupants are the primary buyers of single-family homes and not investors. Thus, even if your single-family rental house’s cap rate is $180,000 and similar properties are selling for $150,000, yours will too.
In contrast, multifamily houses are valued based on the property’s net operating income (NOI). Thus, any value addon work you do will increase the rent, leading to a bigger NOI, increasing your multifamily home’s market value.
Less Vacancy Risk
When a tenant leaves a single-family property, your vacancy rate becomes 100 percent, leading to a negative cash flow until you find another qualified tenant. Contrastingly, it’s difficult for every unit to be vacant simultaneously in a multifamily home.
More so, a multifamily home helps you pay for the property mortgage through the rental income the other occupied units generate until you find a new tenant.
Improve Your Property Portfolio
Unlike single-family investors that calculate value based on houses, multifamily investors look at units or doors. Each multifamily property unit generates its own cash flow.
Therefore, investing in multifamily properties enables you to easily scale up your portfolio cost-effectively without finding and financing several individual properties, which is difficult.
Flexible Financing Options
It’s always easier to finance multifamily homes in most markets using a traditional VA or FHA loan. However, depending on the lender, you might be required to present a more extensive capital reserve account and a higher interest rate.
More Cash Flow
A single-family home’s gross rent might be higher than a multifamily property’s unit rents. However, the cumulative cash flow increases in a multifamily residence.
For instance, if the monthly lease for a single-family home is $1,500, but the rent of a unit in a duplex is $850, you have an extra $200 in gross cash flow from your multifamily investment. And the best part is? Seeing as a multifamily property’s unit is often less than a single-family house, your operating expenses for each unit can also be lower.
Summary
If you’ve been asking, “what is a multifamily home“? we have thoroughly discussed the concept’s meaning, its benefits, and tips for finding the best multifamily deal. Firstly, multifamily is a perfect way to break into the world of residential real estate investment. You can decide to live in a unit and rent the rest out to generate monthly income.
However, like other investments, multifamily investing will require a considerable commitment of your resources and time. Thus, ensure you’re ready before delving into it.
Suppose you’re interested in learning more about multifamily investment or any other real estate concept; consider attending the Real Estate Masters Summit and have an opportunity to interact with fellow investors, top industry professionals, and real estate agents that can help you find a multifamily property when you’re ready to invest.
What’s more? These industry experts are available to answer any question you might have as an investor to help you find and purchase the best properties, especially if you seek to earn passive income from the investment.
So what are you waiting for? Register for the summit now!