Is a multifamily home the right investment for you?

Dreaming of steady rental income and growing your wealth? Owning a multifamily home can be a good option for aspiring or seasoned real estate investors to reap the benefits of real estate investing and make a passive income from a rental property. But is it the right fit for you? This article dives into the realities of multifamily home investing, exploring the potential financial rewards, the management responsibilities and the unique risks involved. So, whether you are a seasoned investor or just starting out, let us explore if becoming a multifamily landlord is the path to your real estate goals.

What is a multifamily home?

Multifamily homes are residences designed for multiple households to live independently under one roof. This can range from a duplex, with two units, to apartment buildings with dozens of dwellings. Unlike single-family homes, even if rented out, multifamily properties have distinct characteristics.

Each unit typically boasts its own kitchen, bathroom and entrance, allowing separate living spaces for different tenants. This shared nature of walls and potential amenities create a unique experience for residents compared to a traditional single-family home.

Multifamily homes vs. single-family homes

The key distinction between multifamily and single-family homes is in the number of dwelling units. Single-family homes stand alone, with one household occupying the entire structure.

They offer privacy and a sense of ownership, with residents having control over their yard and potentially more freedom to make modifications. In contrast, multifamily homes house multiple families in separate units.

These units often share walls, ceilings and sometimes amenities, creating a more connected living environment. Financially, multifamily properties can generate rental income from multiple tenants, but also involve managing those tenants and potentially facing shared maintenance issues.

Types of multifamily properties

The table below offers a breakdown of common multifamily housing types, highlighting their unique features, and helping you find the one that best suits your investment goals and lifestyle.

Advantages and disadvantages of a multifamily home

As with any investment, multifamily properties come with a unique set of advantages and disadvantages. Understanding these pros and cons is crucial before diving into the world of multifamily ownership. This section will explore both sides of the coin, helping you weigh the potential benefits of increased income and appreciation against the realities of management responsibilities and potential risks.

Advantages

• Increased cash flow: These properties offer the potential for significantly higher cash flow compared to single-family rentals. With multiple tenants paying rent, you can experience a steady stream of income that can boost your overall return on investment.
• Convenient maintenance: While maintenance is still a factor, managing repairs and upkeep can be more efficient with multifamily properties. For example, if a plumber needs to visit the building to fix a leaky faucet in one unit, they might be able to address a similar issue in another unit during the same visit.
• An expanded investment portfolio: Adding a multifamily property to your investment mix can help diversify your holdings and potentially mitigate risk. Unlike single-family homes, a vacancy in one unit will not wipe out your entire rental income.
• Tax benefits: These properties offer tax benefits for investors. You can deduct operating expenses, like mortgage interest, property taxes and repairs, from your rental income. Additionally, depreciation allows you to spread out the cost of the property over time, further reducing your taxable income.

Disadvantages

• Increased expenses: While multifamily properties offer the potential for higher income, they also come with increased expenses. These can include property taxes, insurance, maintenance costs (potentially for multiple units) and vacancy periods where you might not be collecting rent.
• A bigger time commitment: Managing a multifamily property can be significantly more time-consuming compared to a single-family rental. You might be responsible for tenant screening, handling repairs and overall property upkeep. This can be a significant commitment, especially for investors seeking a more passive income stream.
• A higher purchase price: The upfront cost of acquiring a multifamily property is typically much higher than a single-family home. This can be a barrier to entry for investors and requires a larger down payment and potentially more complex financing.
• Difficulty reselling: The market for multifamily properties can be less liquid compared to single-family homes. Finding a buyer willing to take on a multiunit investment might take longer, especially depending on the property size and location.

Should you invest in a multifamily property?

Multifamily properties can be a lucrative investment, but they are not a one-size-fits-all solution. Good candidates for investing in a multifamily property include experienced real estate investors, income-seekers and first-time home buyers who are willing to live in one unit while renting out the remaining units. People who should consider other investment options include hands-off investors, those who do not want all the responsibilities that come with owning multiple units and the financially unprepared.

The decision hinges on your financial goals, risk tolerance and comfort level with property management. Carefully weigh the pros and cons and consider consulting with a financial advisor to determine if multifamily investing aligns with your long-term strategy.

Considerations when purchasing a multifamily home

Before taking the plunge, here are key factors to consider when evaluating a multifamily property as a potential investment:

Location

Just like with single-family homes, location is paramount for multifamily properties. It significantly impacts your ability to maintain or increase property value and attract high-quality tenants, ultimately influencing your investment's success.

Upfront costs

While multifamily properties offer the potential for greater returns, they also come with a higher upfront investment compared to single-family homes. These costs include a down payment, closing costs and repair costs. 

Number of units

The number of units in a multifamily property is a critical factor impacting both your potential income and the workload involved. Investors seeking a higher return on investment might gravitate toward larger properties with more income potential. However, they will also need to be prepared for the increased management responsibilities.

Rental income

The number of occupied units and the rental rates per unit influences how much you can expect to earn in rental income. Once you have a grasp of these factors, you can estimate your gross potential income by multiplying the monthly rent per unit by the number of units and then by 12 (months in a year). However, remember to consider vacancy rates and ongoing expenses to arrive at a more realistic estimate of your rental income.

Maintenance

Owning and managing a multifamily dwelling will require maintenance needs. There will potentially be more plumbing issues, electrical problems or appliance breakdowns compared to a single-family home.

Unlike a single-family home where you might have just one set of appliances to worry about, a multifamily property can have multiple refrigerators, stoves, dishwashers and washing machines depending on the number of units. Multifamily dwellings, especially larger ones, have multiple HVAC systems to maintain comfortable temperatures in each unit.

The bottom line: A multifamily home can be a wise investment

Multifamily homes offer the potential for a steady stream of rental income through multiple units. However, they also come with increased responsibility in terms of property management and maintenance. Whether a multifamily property is the right investment for you depends on your financial goals, risk tolerance and comfort level with managing tenants and repairs.

If you’re ready to take the plunge into homeownership, either with a multifamily property or a home of any kind, start the mortgage approval process today.