In this article:
Buying an investment property can help diversify your portfolio while providing a steady source of additional income each month. If you're looking to invest in real estate, multifamily homes may provide even more flexibility. These multiunit properties allow owners to live in one unit and rent out the others—effectively reducing their housing costs and creating a reliable stream of passive income. As such, buying a multifamily home can be a sound investment and great additional source of income.
What Is a Multifamily Home?
Multifamily homes can take many forms. Unlike single-family homes, which are designed for single occupancy, multifamily dwellings contain more than one housing unit. Duplexes, apartment complexes and townhouses all fall under this umbrella. These homes allow multiple families to live in their own private sections of one property.
3 Reasons Why Buying a Multifamily Home Is a Good Idea
Investing in residential real estate can enable you to make money by renting to tenants. The idea is to charge enough rent to cover your monthly expenses (including taxes and insurance) while also turning a profit. You may also earn more on the back end if you sell the property for a profit at a later time. Multifamily properties are unique in that they typically provide these additional financial benefits:
- Reduce your living costs. Many investors are attracted to multifamily homes because they can significantly decrease their own housing costs. For example, the average price for a single-family home in Orlando is $300,275, according to Zillow, while there are duplexes on the market for about 25% to 40% less.
You can reduce your costs even more if you occupy one of the units yourself. Every dollar you charge in rent will reduce your monthly mortgage payment. Freeing up this kind of income can provide financial peace of mind and help you reach your financial goals faster.
- Grow your investment portfolio. Whether or not you choose to live in one of the units, adding a multifamily home to your investment portfolio can provide some diversity. Think of it as another way to potentially grow your wealth over the long term and shore up your nest egg. Your investment returns can increase even more once you're free from mortgage payments and own the property outright. Either way, the money you spend maintaining your rental units is tax-deductible. Like most investments, however, there is no guarantee of returns—in this case, that your multifamily home's value will increase over time or that you'll be able to rent out the units.
- Expand your housing options. Having the additional space that a multifamily home provides can come in handy if you need to take in an aging parent or adult child. As of July 2020, more than half of young adults lived with one or both of their parents, according to the Pew Research Center. Renting to a family member (or letting them stay for free) provides privacy and a housing solution.
What to Consider Before Buying a Multifamily Property
Before making a bid on a multifamily property, it's wise to consider the following details:
- Your financial health: Like other types of investments, you'll want to make sure you're on solid financial ground before pursuing a multifamily home. In addition to the costs associated with buying the home, you'll also need to be ready to address maintenance issues big and small. This can include everything from a leaky roof to a burst pipe. Costs related to homeowners insurance and property taxes will fall on you as well. It's also smart to pay down high-interest debt and build up your emergency fund before investing in a multifamily home to avoid financial stress that could harm your credit.
- Your ability to be a landlord: Be prepared to find reliable tenants, which involves screening applicants and running background and credit checks. From there, you'll have to make yourself available to fix problems with the property as they arise. Hiring a property manager can take this weight off your shoulders, but adds another expense to your ownership costs.
- Your potential return on investment: Buying a multifamily home doesn't guarantee future investment returns. The housing market in your area will play an important role in helping you determine if a property is right for you. Is it likely to attract tenants? And what do the average market rents and property taxes look like? Also consider whether the property values in the area are increasing or decreasing. You'll also want to factor in the cost of your down payment, monthly mortgage and closing costs.
How to Buy a Multifamily Home
You'll typically need a larger down payment—often 20% to 30%—when purchasing an investment property. However, multifamily homes with fewer than five units may provide a loophole. If you plan on living in one of the units, you may qualify for more traditional financing options. FHA loans allow for down payments as low as 3.5%, for example. If the home will be a traditional investment property that you will not occupy, you'll need to have good credit to qualify for financing. The minimum credit score for a mortgage used for an investment property is usually 620.
No matter how you finance your multifamily property, you'll want to pay extra attention to your home inspection. The last thing you want is to finalize the transaction only to find costly home repairs waiting for you on the other side. If all looks good, you'll move forward with the contract. Just keep in mind that your closing costs will increase your final spend by another 2% to 5% of the home price.
The Bottom Line
Buying a multifamily home can be a great investment that reduces your housing costs and unlocks additional monthly income. It can also grow your wealth over the long run, though it's not without risks. The first step is getting your credit as strong as it can be so you can qualify for the best financing options. Experian's free credit monitoring can help you get there.