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What Is a Multifamily Home & Is It Right For You?

May 9, 2022

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5
Min Read
Row of houses

Reports from the Department of Housing and Urban Development revealed an estimated 32.6 million residences in the U.S. are multifamily.

A multifamily home is a residential property set up with multiple housing units without exceeding four living spaces in total. Many investors weigh the benefits of a multifamily home over a single-family unit. Therefore, contemplating real estate strategies that will gain you passive income is an intelligent move, even for novice investors.

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Even for new investors with multifamily homes, generating passive income can be a reality. But are these investment options suitable for you? 

Consequently, there are many reasons for either investment option, and finding out if multifamily units are correct for you takes a bit of homework.

Examples of multi family homes include:

• Duplexes

• Townhouses

• Four unit apartment buildings

• Quadplexes

So, is a multifamily home right for you? 

Types of Multifamily Dwellings

Duplex

A duplex is a single dwelling with side-by-side or two-story living spaces. While they might have a shared main entrance, the door for entering the living area is within the unit.

Triplex and Quadruplex

Triplexes and quadruplexes are similar to duplexes except they have 3 units and 4 units, respectively.

Townhouse

Spaces available for two families separated by an interior wall are known as townhouses. Each unit is its own home, purchased by the individual residents. They also have dedicated entrances.

Multifamily Vs. Single-Family Home

For whichever type of home you choose, an investor should be sure their budget supports it. 

Estimating a property's profit potential is an integral part of the investment process. Recognizing multifamily homes' higher monthly income from rentals, lower total maintenance costs, and higher profitability over single-family homes is beneficial to investors. 

A multifamily unit draws the rental income from multiple tenants, so if one should leave, the cash flow should not encounter such a stark disruption as to make it unmanageable. That cash flow potential is not the case with single-family units, and single-family homes tend to have lower and slower growth than multiple units. One dwelling can have multiple growth paths with a multifamily home since it can house numerous residents. 

A Boost in Cash Flow from Your Investment

Because you will be able to draw on the income a single dwelling draws from multiple renters, you can offset the cost of the mortgage and other housing expenses. On the way to passive income, investors may find that the rent is enough to supplement the entire house payment. Property taxes and homeowners insurance are also regular expenses for a home.

In a single-family home, it's just the tenants that live in the unit. You do not have the same freedom to live on-premises as you would in a multifamily unit. If you live close by, you can respond sooner if and when problems rear their head. Having the additional income from multiple renters in a single dwelling is a pretty tall advantage of multifamily units. Managing these instances can help you manage property values.

Taxes and Multifamily Units

Repairs and maintenance can be written off as a business expense, and even a portion of your mortgage interest payments can be prorated. As a result, you can deduct your expenses from your total taxable income.

Cons of a Multifamily Home

With any investment, there are cons to consider. As a landlord, you are responsible for all repairs. Upkeep relies on you, which could become extensive if the circumstances demand it. Additionally, landlords have a time commitment to assess. Living in one of your units may save time in response, but it could also require you to answer the door for tenants at all hours of the day (and night).

Since a multifamily home is a more considerable opportunity often, it also carries a larger purchase price. With a single-family home, you have a lower barrier of entry. A down payment of 5%-20% of the home's value is typical. Multifamily units typically have a higher barrier of entry, including a 15-25% down from a buyer. The potential earnings are more significant, but that will depend on maximizing the number of units you have tenants renting at one time.

Exits

Investors can sell a single-family home to a homeowner who falls in love with the property. They may not mind going above and beyond to get into the place of their dreams. Investors are also an option. Multifamily homes do have less appreciation in this case since they are often for rentals. 

Since renters are sometimes transitory, the market perceives rental properties as not being cared for quite as diligently. Of course, taking great care of a property is not exclusive to single-family homes, but the appeal for top-notch upkeep is often substantial.

You may not want a hard exit, in which case refinancing and recapitalizing may be an option. Recouping cash and retaining the income stream may also be on the table. The tax benefits are helpful, and some properties might even benefit from bringing in a new capital partner. Injecting cash into the scenario could make adding improvements easier and allow you to step out of your current investment role. 

Residential and commercial real estate agents may be able to help you root out the best investments for your area and your financial circumstances. In addition, multifamily homes can present excellent opportunities for passive income streams. For example, if you purchase a home that you rent and live in, you can move into a separate property while keeping the income-producing investment.

Some investors wonder if they should invest in a single-family home where tenants can have their own space. However, you have to weigh a multifamily decision to increase cash flow, and tenants can help you pay the mortgage. Consider increases in property value, tax breaks, and boosts in monthly net operating income. As is true for all investments, do your due diligence to be sure a multifamily home fits your investment portfolio, your earnings goals, and your budget.

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