What Is a Multi-Family Home and How Do I Buy One?
Multi-family homes have more than one living space, offering the people who buy them a way to earn money by renting out units while living in one part of the home. These properties are increasingly attractive to first-time homebuyers and experienced investors looking for a way to build wealth.
- What is a multi-family home?
- What is a single-family home?
- Pros and cons of single-family vs. multi-family homes
- How to get a multi-family home mortgage
- How to buy a multi-family home in 6 steps
What is a multi-family home?
A multi-family home is a single building that is divided into multiple units for different families to live in. Multi-family homes can range from a duplex (a house divided into two) all the way to massive apartment buildings with hundreds of units.
Many multi-family homes for rent are apartments; however, condominiums purchased by individual owners also fit the definition. In many cases, a buyer will purchase a multi-family home to live in one of the units and rent out the others. This form of real estate investing is also known as “house hacking,” and the rental income helps the homeowner pay the mortgage. Other times, an investor will manage a multi-family home as a business and rent or sell all the units.
So who should consider buying a multi-family home? “Anyone seeking an additional source of income without wanting to exchange time to do so,” according to Sterling White, founder of Sonder Investment Group and a multi-family investor based in Indianapolis.
What is a single-family home?
A single-family home is exactly what it sounds like: a building that contains the living space for one family. On the other hand, multi-family properties have several units rented or owned separately.
An increasing number of real estate investors are choosing to buy single-family homes and rent them out. Nearly 60% of today’s renters live in a single-family home.
Pros and cons of single-family vs. multi-family homes
Single-family homes are more traditional, but even first-time homebuyers have the option of moving into a multi-family home if they choose to do so. Here are a few pros and cons of each.
Single-family home pros and cons
|Easier to find. Single-family homes make up a sizable majority of the housing stock. Multi-family properties are harder to come by.||Limited income ability. If you buy a single-family home, you’ll have to share space if you decide to rent rooms out, or pay your mortgage solo.|
|More privacy. You get the whole building to yourself, without other families living in a unit with a shared wall.||Harder to scale. If your goal is to build a real estate portfolio, it’s easier to scale an investment business buying multi-family properties.|
|Higher resale value. Single-family homes tend to sell for more than multi-family homes. You’ll likely benefit from more price appreciation.||More HOAs. Newer single-family homes may be members of homeowners associations, which adds another layer of costs and rules. Some HOAs don’t let you rent your home.|
Multi-family home pros and cons
|Same low down payment. If you buy a duplex, triplex or quadruplex and live in one of the units, you qualify for the same types of mortgages as you do with a single-family home. These offer down payments as low as 3.5% on FHA loans, compared with a 15% to 25% down payment on an investment property.||Managing tenants. You must find tenants, keep up with repairs in their units, collect payments and pursue evictions (when needed). You can hire a property manager, but that eats into your profits.|
|Help paying your mortgage. With a multi-unit property, you can rent out the other units to earn income that can help pay the monthly mortgage.||More costs. Because of the income potential, multi-family homes typically cost more than single-family homes. Insurance costs are usually higher, too.|
|Good way to get started in real estate investing. Once you get the hang of managing properties, it’s relatively easy to scale up to a larger portfolio.||Harder to buy and sell. It takes time to evaluate a multi-family property deal. This can complicate the process when you’re buying and ultimately selling the home.|
How to get a multi-family home mortgage
The same loan programs available for single-family homes are also available to buy duplexes, triplexes and quadruplexes if you’re living in one of the units.
“More or less, it’s the same process,” said Mike D’Ambrosio, head of underwriting for online mortgage lender Better.com.
However, if you’re not living in one of the units, you’ll need an investment property loan.
Freddie Mac’s Home Possible mortgage is most friendly for multi-unit property purchases, allowing a loan-to-value (LTV) ratio up to 95% with a minimum total down payment of 5% (a 3% minimum would have to come from the borrower’s own accounts) on two- to four-unit properties. The credit score requirement is higher though: Borrowers need a minimum 700 score for multi-unit properties, compared with 660 for a one-unit home.
Fannie Mae’s HomeReady program requires a down payment of 15% and 25% for a two-unit property and three- or four-unit property, respectively, with a 3% minimum contribution from the borrower’s own accounts on two- to four-unit homes, with LTV ratios above 80%. In addition, Fannie Mae requires a score of 680 for a multi-family home loan, compared with a minimum of 620 for single-family properties.
FHA loans are insured by the Federal Housing Administration (FHA), and the guidelines are virtually identical for both single-family homes and multi-unit properties. The FHA allows down payments as low as 3.5% on one- to four-unit homes with a credit score of 580, and credit scores even as low as 500 can be accepted with a 10% down payment.
One drawback that adds up: FHA mortgage insurance. You’ll pay an upfront premium, as well as an annual premium in your monthly mortgage payments.
Eligible active-duty military service members, veterans and eligible spouses can use loans guaranteed by the U.S. Department of Veterans Affairs (VA) to buy single-family homes or duplexes, triplexes and quadruplexes without a down payment. There are no longer any loan limits on VA loan purchases. To qualify, you’ll need to apply for a VA Certificate of Eligibility.
VA loan underwriters will take a closer look at your loan application if you’re buying a multi-family property. You typically need six months of cash reserves on hand and a working knowledge of managing rental properties to qualify.
How to buy a multi-family home in 6 steps
Step 1: Do your research. Before you start your multi-family home journey, make sure your eyes are wide open to all it entails. Consider consulting with property managers, D’Ambrosio suggested, and decide whether you want to hire one. Weigh the pros and cons of living in one of the units yourself, and make sure you’re committed to the area for the long haul.
“Homebuyers who need to move quickly, perhaps because of a job change or family event, may find it difficult to complete the research necessary to successfully purchase a multi-family property,” said Than Merrill, a San Diego real estate investor and the founder of FortuneBuilders, a real estate investing education company. “In these cases, it may be better to avoid it for the time being.”
Step 2: Shop around for a mortgage. You can get a sense of how much you’ll be able to borrow by getting a mortgage preapproval. Shop around with three to five different lenders to compare interest rates and loan terms. Ask lenders whether they have experience with multi-unit property loans.
Step 3: Find multi-family homes for sale near you. These listings can be harder to find, but some online real estate websites have filters so you can narrow your search settings to multi-family properties only. Also, network with real estate investors in your area. Some people choose to approach multi-family homeowners through direct mail or door-knocking, even when their homes are off the market.
Step 4: Make an offer and close. Closing on a multi-family home deal can be tricky. You may be asked for more documentation than you’d expect in a single-family home sale, including whether the home has a rental history. Lenders might also ask for a tenant list and any leases currently in place. Depending on the type of loan you’re getting, you may also be required to have a certain amount of cash reserves on hand — as much as six months’ or more worth of mortgage payments.
Step 5: Find tenants. Now that you own the property, you’ll want to find people interested in multi-family homes for rent. If you’ve hired a property manager, they’ll typically handle this part. You can list the units for rent online. Plus, services like Cozy and Tellus help you manage the listings and collect rent payments, too.
Step 6: Get lease agreements in writing. The lease agreement you and your tenants will sign generally includes the lease period, the monthly payment amount, security deposit amount and other fees, who handles utilities, conditions for getting the security deposit back when the lease is up and other key terms. In some states, leases longer than a year are required to be in writing. Consider hiring a real estate attorney to help draft the lease agreement.