Buying a Multifamily Home: A Beginner’s Guide
Buying a multifamily property is a popular way to get started in real estate investing. Multifamily homes help you earn a steady cash flow from multiple rental units and benefit from potential price appreciation. The process involves several steps, however, including deciding how you’ll finance and manage the property.
This guide will cover what you should know about buying a multifamily home, along with the mortgage options, loan requirements and benefits and risks to consider.
What is a multifamily home?
A multifamily home refers to any residential property where multiple families can live, including a duplex or condo. Multifamily properties typically have at least two or more separate housing units and share common areas such as hallways, stairwells and outdoor spaces.
Many aspiring real estate investors are drawn to multifamily homes for their income and appreciation potential. These properties can be managed by the owner, a property management company or a homeowners association (HOA).
Single-family home vs. multifamily home
Investing in a single-family home differs from investing in a multifamily property in several key ways.
Single-family home: Since a single-family home is designed for one family to live in, it typically involves lower upfront and ongoing costs, including a smaller down payment requirement and reduced property management expenses. Additionally, single-family homes tend to have less tenant turnover, as well as lower maintenance and utility costs.
Multifamily property: Buying a multifamily home typically involves higher initial and ongoing costs. However, it offers more diversification than a single-family home since you can rent out multiple units and have greater income potential. There’s also reduced risk because you’re not reliant on a single tenant for your rental income.
Multifamily home examples
Multifamily homes can generally be defined as any property with more than one housing unit. Here are examples of the different types of multifamily properties:
| House type | Description |
|---|---|
| Duplex/triplex/quadruplex | A house with two, three or four units and any number of stories. |
| Townhouse/row house | A building that has at least two stories and at least two units joined by common walls, located in a complex of such dwellings. |
| Condo | A building consisting of several units wherein each owner owns the interior of the unit and holds a joint ownership of the exterior, common areas and building facilities, such as the land, roof, elevators, etc. |
| Conventional apartments | A building consisting of several units that are built above and below each other. |
| Mixed-use | A building that is used for various purposes, such as residential, commercial and retail. |
Read more about refinancing a commercial property.6 steps to buying a multifamily property
Navigating the purchase of a multifamily home can be intimidating, especially for beginners. Here are some steps to help the process go smoothly:
- Determine how much you can afford. Take an honest look at your financial situation, including your income, expenses and current savings, to determine the mortgage payment you can afford. Consider factors like your down payment, closing costs and necessary renovation expenses. You’ll also want to factor in your potential rental earnings.
- Choose a loan type and lender. Loan options for multifamily properties include conventional, FHA, VA and commercial loans. Once you decide on a loan type, apply for mortgage preapproval. It’s a good idea to compare several different mortgage lenders since terms and rates can vary between companies.
- Shop for a home. Once you know the type of multifamily home you’re looking to buy (such as a condo or duplex), use online tools like MLS to explore properties in your area. A real estate agent can assist in finding suitable options and offer valuable guidance throughout the process.
- Fill out a mortgage application. At this stage, you’ll need to provide the lender with documents to verify your income, employment status, credit history and savings. Once you submit the application, the lender has three business days to provide you with a loan estimate, which details your quoted mortgage rate, monthly payment, closing costs and other important information about your loan.
- Make an offer and close the deal. Once you find a house you want to buy, it’s time to submit an offer. Having a real estate agent is beneficial to help with negotiations. After the seller accepts your offer, you move into the closing process, which involves getting an appraisal and inspection and paying closing costs.
- Decide how you’ll manage the property. Will you manage it yourself or hire a property management company? No matter which option you choose, it’s crucial to set aside funds for both routine maintenance and unexpected home repairs.
How to get ready for a multifamily home loan
→ Explore financing options. Multifamily properties are eligible for several different types of mortgage loans, including conventional, government-backed and commercial loans. Buildings with less than five units typically qualify for traditional financing. Properties with five or more units likely need a commercial loan.
→ Save for your down payment. Your down payment for a multifamily property will depend on your loan type. Conventional loans now require just a 5% down payment. If you qualify for an FHA loan, you could put down as little as 3.5%.
→ Work on your credit. Boosting your credit by managing your debt, paying bills on time and correcting any errors on your credit report can help improve your loan approval odds. Paying off debt also helps your debt-to-income ratio, which is a key factor in qualifying for a mortgage.
→ Explore local resources. Research housing assistance in your area, including first-time homebuyer programs, down payment assistance and grants that might be available through your state or city.
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Multifamily loan requirements
Here are some of the key requirements for the main types of multifamily home loans:
| Loan type | Requirements |
|---|---|
| Conventional |
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| FHA |
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| VA |
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Should you buy a multifamily home?
The advantages of multifamily investing include:
Rental income. The steady cash flow from renting out a multifamily property can help you pay off debt, build equity in the property, invest in the stock market or start a business. This is also one way you can house hack.
Risk diversification. Multifamily homes have multiple units and, therefore, separate income sources — so if one tenant moves out, you can still receive income from the other tenants.
Tax benefits. Owning a multifamily home allows you to write off your mortgage interest and the cost of repairs, maintenance and advertising as business expenses.
The disadvantages of multifamily investing include:
Higher upfront costs. A multifamily property might have a higher price tag than a single-family home. This can translate to a larger down payment, a higher tax bill and pricier homeowners insurance, especially if you need a commercial loan.
Property management needs. Since you’re dealing with multiple tenants, property management can be complex. If you manage it yourself, you could get calls from tenants day or night. If you hire a property management company, you’ll need to factor that cost into your budget.
You may need cash reserves. Depending on the type of loan you’re getting, you may need to have a certain amount of cash reserves on hand — in some cases, three to six months’ worth of mortgage payments.
Frequently asked questions
If you’re short on cash for a down payment, consider buying a multifamily home with funds from a cash-out refinance, home equity loan or hard money lender. Other options include finding a partner or co-borrower who is willing to front the cash, or waiting to buy until you save up the money.
You can get an FHA loan to buy multifamily properties if you meet certain requirements. To qualify, you must live in one of the units as your primary residence and have at least a 500 credit score. Additionally, you’ll need cash reserves equivalent to three months’ worth of PITI payments if you’re buying a property with three or four units.
It depends on your needs and goals. Single-family homes are generally easier to manage but may offer less income potential. Multifamily properties, while more complex to manage, can generate higher income since they have multiple rental units.
Buying a multifamily property can be a good investment for people seeking consistent cash flow and potential price appreciation. However, like any investment, it’s important to weigh the benefits and risks to determine whether it’s the right fit for you.