What Is a Multifamily Home? A Budget-Friendly Way to Own, Rent, or Invest in Real Estate

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Multi-family dwellings are buildings with more than one unit in which people can live, each with its own separate kitchen, living room, electric bill, etc. They are also known as multi-dwelling units, or MDUs, and are usually found in densely populated areas, such as cities, where space is at a premium. MDUs can be rented, owned, or used as an investment property where the landlord can collect rent from the tenant.

There are millions of multi-family dwellings across the country, compared to 90 million single-family homes. While living in close proximity to others may not be ideal in terms of privacy or noise, people who live in multifamily housing generally pay less than those who live in single-family homes and are levied fewer home maintenance fees because the management company may be responsible for repairing the building’s exterior or mowing the lawn.

Types of multifamily homes

Multi-family dwellings come in all shapes and sizes. Here are some of the more common designs.

  • Duplex: Two homes in one freestanding structure
  • Townhouse: Any number of homes attached at the sides with separate entrances
  • Condominiums (condo): A private residence in a building or community with multiple units
  • Apartment building: Could be up to hundreds of homes in one structure. Unlike the above dwellings, apartment building units are often rented by tenants rather than owned.

How to invest in a multifamily home

Buying a multi-family home for rental purposes (or living in a unit and renting out the rest) is a smart financial strategy – today more than ever. Here’s why: Homeownership is declining, having recently fallen below the historical average of 66.6 percent.

“This makes it a good time to consider buying an investment property because people have to have somewhere to live,” says Daren Blomquist, senior vice president of ATTOM Data Solutions.

Unlike speculators who invest a small amount of time and tolerate a lot of risk, investors in multifamily housing should expect to own the property and play landlord for decades, advises Blomquist, who owns two rental properties with his wife.

“If you take care of a rental property for 20 years, it will take care of you for the rest of your life,” Blomquist says.” The goal is to be very long-term.”

The trick is to expect the unexpected. You may have problems with unstable tenants and damage. Consider these factors before investing.

  • Cap rate: The capitalization rate is a formula that indicates the potential return of an investment. Calculate the cap rate by dividing the net operating income (how much you pocket after expenses) by the price of the property. Blomquist would consider a rental property with a cap rate of more than 6% to be acceptable.
  • Expenses: Some multifamily property expenses such as mortgage, taxes, and insurance are relatively fixed; maintenance, however, is always unpredictable. New properties, with appliances and furnaces still under warranty, usually require little maintenance. However, properties more than 20 years old are bound to require new roofs, foundation repairs, and upgraded HVAC equipment. These unexpected maintenance bills can really eat into the profit of investment properties.
  • Turnover: Rarely does one tenant leave and another move in the next day. Blomquist says two months between tenants is common, and that means two months without income likely coupled with higher-than-usual expenses as you repair walls, clean carpets, and maybe paint to make the property more appealing.
  • Your personality: Do you have the patience of a saint? Can you focus on the forest rather than the trees? You’ll need those Zen-like qualities, along with some handyman chops, to succeed in multifamily investing. If your personality isn’t suited to being a landlord, you can always hire a property manager to fix things and find renters. But don’t forget you’ll be charged a fee, usually about 6% of your rental income, which eats into profits.

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