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Multi-family homes – or homes that house more than one family unit – can be a good way for investors to generate income, as long as you have the money to buy and manage the property.
Here’s what you need to know about multi-family homes and how they differ from single-family properties.
What is a multi-family house?
A multi-family dwelling is a house in which several families live at the same time. Types of multi-family homes include apartments, condominiums, duplexes, and townhouses. Here’s what you need to know about each type.
- Apartment: Apartments are multiple accommodation units within a single building. There may be many units or a few units, depending on the size of the building and each apartment it contains; there can be one, two and three bedroom apartments. There are also studios, which are usually a large open space (no doors to other rooms) that has a living room and a bedroom.
- Condominium: Condos are similar to apartments, but you can buy and own one unit or multiple units for rent. The units to be purchased are condos, while those to be rented are called apartments. If you’re buying a condo, you’ll likely have to pay homeowners association (HOA) fees and other necessary costs to run each condo you own.
- Duplex: A duplex is made up of two units side by side, separated by a single wall. Each unit has its own entrance. There are also triplexes for three-unit structures and quadruplexes which have four units in a single row.
- Townhouse : A townhouse usually has multiple levels, usually two or three, and sits in a row next to other townhouses. The houses all have their own entrances and living areas, but are separated by a single wall.
Related: Condo Vs. Townhouse: Which Should You Buy?
Cost of building a multi-family house
The cost of building a multi-family home depends on a few different factors, including:
- Where the property is built
- The cost of materials, labor and contractors
- How big is the property and how many units there are
- Your credit score and cash flow
For this reason, the total cost of building a multi-family home can vary greatly. But you can expect to pay between $64,500 and $86,000 per unit. Large multi-family buildings, like an apartment, can total millions of dollars.
Advantages and disadvantages of owning a multi-family home
For some, real estate investing can start as a side hustle and if you earn enough, it can replace the income you get from your daily job. But for potential investors, owning a multi-family home has its pros and cons.
Advantages of a multi-family house
- Income can be lucrative. The money you earn from renting units usually covers the cost of your mortgage payment and other expenses, and more. But it depends on how many units you have and the price you charge for each one. As an owner, you can usually charge whatever you want, and as long as you max out the capacity, you can make a good profit.
- May outsource management. Some rental property owners outsource the property management to another company or person, which means you are less responsible. This is an additional cost, but if you find your time is more valuable elsewhere, or you don’t have the experience to manage the property, it could be a worthwhile investment.
- Place of life guaranteed. Although you don’t have to live on site, you could save money by living in one of the units and renting out the rest. This means that you do not pay additional mortgage payments or rent for another house.
Related: Mortgage calculator: calculate your mortgage payment
Disadvantages of a multi-family house
- High initial costs. If you’re building your own building from scratch, it can be an expensive start. If you buy one at a low price, you may also have to cover significant renovation costs. Either way, you need to have a considerable amount of money to pay for unexpected expenses.
- More responsibilities. Renting units means that you are the owner. You are in charge of maintenance, replacements and general problems. It also means that if a washing machine breaks down or a pipe bursts, you are responsible for fixing it in a timely manner, whether by hiring a contractor or doing it yourself.
- Potential loss. Regardless of the problem, your mortgage payment is still due. If your tenant is behind with rent, misses a month, or you have a few vacant units, there’s a chance you could incur a loss. This means that you will need significant cash reserves to cover these potential losses.
- Higher turnover. It depends on the type of multi-family unit you own. If you have a duplex, this may not be the case. But if you own an apartment complex, your revenue could be higher compared to single-family homes and structures with fewer units. Each time a new tenant arrives, it means more time to schedule visits, process paperwork and manage the move-in.
- Local government taxes and restrictions. Since multi-family units are larger and cost more than a single-family unit, you will likely pay higher property taxes. Some local governments also have strong protections for tenants, like rent control, which means you can only raise rent up to a certain amount per year, for example. It is therefore important to calculate these costs in your budget before buying the property.
Single-Family Home vs. Multi-Family Home
The differences between single-family and multi-family homes are not just about the number of people who live in the house. Here are some other factors to consider:
Number of tenants
In a single-family home, there is only one tenant, whether it is a family or a single person. With a multi-family home, you can increase your pool of tenants up to the number of units you have.
For example, let’s say the mortgage on your single family home is $1,500 and the mortgage on your duplex is $2,000. If you charge the same amount to each of the three tenants ($2,000 per month), your income is very different. You will earn $500 profit on the single family home and $2,000 on your duplex.
Repairs, maintenance and renovations
A single-family and multi-family home will have some maintenance. But think about how much extra work you’ll have to handle based on how many units you have. For single-family homes, you only have to manage one air conditioner, one electrical panel, and one set of appliances.
For multi-family homes, you may need to manage and repair two of everything or even 20 of everything, depending on how many units you are managing. The more units you have, the more you will be responsible for potential repairs. You can outsource this to a management company, but this will also incur an additional cost.
Overall, there are more upfront costs when it comes to buying a multi-family home than a single-family home, including a larger down payment, repairs and renovations, and higher monthly mortgage payments. important. If you need to replace anything on a single family home property, these may be one-time costs. But for a multi-family home, you may need to replace the same thing in multiple units, whether it’s carpeting or new plumbing.
Although multi-family homes can be a great investment to add to your portfolio, they can cost more than other types of investments. Make sure this financial and time commitment is one you are willing to make before buying your own property.
Related: Mortgage Closing Costs Explained: How Much You’ll Pay
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