When you become a real estate investor, there’s an entire dictionary of new jargon to master: net operating income, return on investment, single-family, multifamily. But you can’t know what to buy for your real estate portfolio until you’re familiar with these terms. Today we’ll focus on the multifamily home. If you’ve been wondering, “What is a multifamily home?” or more importantly, “How is it different from any other type of property?”, this piece will break down the facts.
Before we move any further, it’s important to know the basics. When discussing terms such as commercial, residential, single-family or multifamily, it’s important to understand these are legal designations for a single parcel or tract of land. Every piece of land has this legal designation, but it is different depending on the use of the property, and how many dwellings sit on top of the land.
What Constitutes A Multifamily Home?
Stated simply, a multifamily home is a building that houses separate residences where more than one family can reside. Multifamily homes must have kitchens and bathrooms for each unit, a separate entrance and separate utility meters.
A multifamily home could be a duplex, or a small apartment, townhome, or condo complex. In the real estate sphere, a multifamily home is a property with four units or less. More than four units? These properties are referred to as commercial properties.
It can be confusing to discern the difference between a multifamily property and a single-family home with, say, a finished basement or carriage house. Technically, couldn’t they all be multifamily properties? Yes, but the big distinguishing factor with multifamily units is that these will have different legal addresses.
Think of it this way: multifamily units enable separate families to live on the same property but completely independent of one another. So, this would be different than for example, a single-family home with a finished basement where the tenant in the basement also shares the same front door as the family living upstairs.
Who Buys Multifamily Properties?
Multifamily properties may appeal to the following individuals:
- Novice real estate investors who want to buy a primary residence and rent out the additional units.
- Multigenerational families: those with aging family members, a college-age adult, or families who share in childcare responsibilities.
- Experienced real estate investors who want the benefit of multiple units within one property purchase.
- Anyone who wants to add rental income to their earnings.
As a type of investment property, multifamily units are in high demand among real estate investors who like to use the “buy and hold” investment strategy. They’re so in demand because, instead of spending time and energy to acquire four separate units, busy investors can buy one property with multiple units within and devote time and energy into vetting the one property.
Multifamily homes make particularly good investments for beginner investors because they’re more easily financed than other rental properties. Investors just starting out can also “house hack,” which is a popular real estate investment strategy where someone buys a multifamily property, lives in one unit and rents out the rest, gaining the financial benefits of both homeownership and real estate investing.
Types of Multifamily Homes
Unless you’re a licensed real estate agent or someone very experienced in real estate terminology, the designations can get confusing – fast. Multifamily and single-family are legal designations, not terms for the architectural style of the home. The legal description is for city zoning purposes and for ease during the purchase and sale of a property, but it’s also how agents help their clients navigate the market.
- One piece of property (a tract or parcel of land) in any given town can be zoned either residential or commercial.
- Residential properties can be classified as the following: Single-family home, multifamily home, condo, townhome, apartment.
- The reason residential properties can have so many names comes down to ownership: who owns what’s inside the building.
Ultimately, what makes a multifamily home different from a condo, townhome, or apartment is the fact that one person owns the entire dwelling and all the units within.
Duplexes, Triplexes And Quadplexes
Not all multifamily properties are the same. In fact, multifamily homes come in a variety of “flavors,” depending upon what you are looking for.
- A duplex is a multifamily home with two units on one plot of land
- A triplex is a multifamily home with three units on one plot of land
- A quadplex is a multifamily home with four units on one plot of land
The distinction “one plot of land” is important. In some cities, there are properties called “twin homes” where the property looks like a duplex, but each of the units sits on a separate plot of land even though they still share the common wall and structure.
Typically, a “plex” home is a former single-family home that eventually became split into multiple units. All of these units will share a wall with the other, but in order to qualify as a multifamily property, these homes should come with separate entrances, separate utility meters, and separate kitchens and bathrooms.
Condominiums are different from apartments and townhomes and it comes down to ownership - a condo owner really only owns what is in their unit. They “share” ownership of the condo’s common areas: pool, gym, shared walls. This is why condos almost always come with a homeowners association (HOA) that governs the building, collects payment from each owner, and handles the maintenance of the common areas.
Remember, any property with more than four units is a commercial property, even if the property is used for residential purposes. This makes most apartment buildings commercial properties since most apartment buildings come with far more than four units in each building.
Apartment complexes can also have more than one building on a single piece of property or plot of land.
From an ownership perspective, apartment units typically have neighbors on all sides (left, right, above, and below), making privacy, noise, and sharing common walls and amenities with neighbors some of the chief concerns of apartment living. Typically, one person owns the apartment complex and rents each unit individually, but some apartments can be owned, in which case they’d then be considered a condominium.
In terms of ownership, townhouses are very similar to the condominium, but a townhome actually does refer to the architectural style of home and how it’s built.
Townhouses are different from apartments and duplexes because they are often built as a standalone home (rather than built as a single-family home then split into separate units), have multiple levels, but the homes will share a connecting wall in between each unit.
Townhouses are built in rows, usually in cities where land and real estate are at a premium, but because of the common walls, all owners function within a homeowners association that governs the entire property.
Benefits And Drawbacks of Multifamily Homes
As an investor, there are many benefits to a multifamily property, but like any potential investment, they do come with downsides. Particularly if you are looking to live within the multifamily property and rent out the remaining units, there may be drawbacks to this type of property.
The biggest benefits to purchasing a multifamily home lies in the boost it could give your finances.
- For owner/investors planning to live as well as rent the units, multifamily homes provide the ability to generate rental income on top of the mortgage payment.
- For many owners, investing in a multifamily unit may enable them to live mortgage free.
- There are also tax benefits for owner/investors like writing off home maintenance as a business expense and prorating mortgage payments.
For multigenerational families, multifamily homes provide what single-family homes with separate living spaces cannot: true privacy for each family member while allowing them to maintain close proximity.
And finally, for experienced investors, a multifamily unit provides the opportunity to instantly diversify and grow a real estate portfolio.
Depending upon where you live, multifamily homes may be quite rare and the competition for them fierce.
There are also several financial factors to consider if you’re thinking about purchasing a multifamily home, particularly as a first-time investor. Often, because of the potential rental income available, multifamily homes are much more expensive than single-family properties, so you’ll need to have a lot of cash, or qualify for a large amount of financing.
While there are tax benefits to having an investment property, also factor in the costs associated with being a landlord: maintenance, repairs and vacancies. An owner of a multifamily unit may need more in emergency reserves than someone with a single-family home as the more units in a multifamily property, the greater the risk of having vacancies.
How To Find A Multifamily Property
The search for a multifamily home is much the same as the search for any other type of property. There are the traditional avenues, such as conducting your own online search, using a trusted real estate agent, or attending foreclosure auctions.
Due diligence on a multifamily property may be a bit different – and trickier – than on a single-family property as you’ll need to coordinate inspections, appraisals and any other housekeeping-type items among multiple sets of tenants.
Even though having multiple families in play as tenants may make things more complicated from a logistics perspective, don’t let this deter you from doing proper due diligence. As with any other property, whether as an investment or your primary residence, be sure to look at all the deciding factors. Conduct a property inspection, look at current owner’s accounting records, and do quick calculations on gross rent and net operating income to make sure the numbers make sense.
The last thing you’ll want to do is get a multifamily property but only be able to keep it partially rented.
The Bottom Line
- A multifamily property may be just the ticket for those in certain circumstances: novice and experienced real estate investors alike, multigenerational families, or those who want to live without a mortgage.
- Multifamily properties come in a variety of types: apartments, condos, townhomes and “plex” homes (duplex, triplex, quadplex).
- Multifamily homes are typically more expensive than their single-family counterparts and are more expensive to maintain, but they come with potential for rental income.
This is just a quick overview to answer, “what is a multifamily home?” and a bit more detail on the distinctions between the different types of multifamily properties. For an even deeper dive into some of the terminology we covered in this piece, be sure to check out more home buying content in the comprehensive Quicken Loans® Learning Center.