What Is A Multifamily Home, And Is It Right For You?

If you want to get into real estate investing, you should first become familiar with the different types of properties you may be adding to your portfolio. One of the property types you may look at could be a multifamily home.

How can you tell a multifamily home from other types of property, and what makes them all different from each other? This article will explain the particulars of what makes a multifamily home what it is, as well as the different shapes and sizes they can come in.

Definition: What Does Multifamily Home Mean?

The definition of a multifamily home is a residential property that has 5 or more housing units where more than one family can reside, like an apartment complex. Often the property’s owner will live in one of the units – this is known as “owner-occupied property.”

You’ll notice this is different from what the typical consumer might think a multifamily home is. Technically, any home with 4 units or less is considered single-family housing and meets regular residential lending standards.

Multifamily homes must have kitchens and bathrooms for each unit, as well as separate entrances and utility meters.

In the real estate sphere, a multifamily home is a property with 5 units or more. Properties with more than 4 units are also referred to as commercial properties.

Unless you’re a licensed real estate agent or someone very experienced in real estate terminology, the legal designations of different properties can get confusing. The legal description is for city zoning purposes and for ease during the purchase or sale of a property, but it’s also how agents help their clients navigate the market.

Let’s break down some important zoning factors:

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.

Multifamily Vs. Single-Family Homes

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, they could all be multifamily properties, but the big distinguishing factor with multifamily homes is that these will have 5 or more units.

This is very different from a logical conception that a multifamily home is anything with separate units. You can have four families living completely independently of each other and it would still be single-family housing. In this case, it’s the number of units that really matters.

Types of Multifamily Properties

Not all multifamily properties are the same. In fact, multifamily homes can come in a variety of shapes and sizes depending on what you’re looking for. Although to this point we’ve spent a ton of time on legal distinctions, it probably makes more sense from this point forward to speak about multifamily properties the way people usually refer to them – anything with multiple units.

Let’s take a look at some examples below:

Duplexes, Triplexes And Quadplexes

Typically, a “plex” home is a single-family home that’s split into multiple units. All of these units can share a wall with the other, but in order to meet the definition people typically think of as a multifamily property, these homes should come with separate entrances, separate utility meters and separate kitchens and bathrooms.

Different “plex” homes can be distinguished by the following factors:

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. Each of these plexes would technically be considered single-family construction.

Condos

Condos, or condominiums, are different from apartments and townhomes in that 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, etc. 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. These are also typically handled by single-family lenders.

Apartments

From an ownership perspective, apartment units typically have neighbors on all sides (left, right, above, and below). This can make privacy, noise, sharing common walls and using 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.

Remember, any property with more than 4 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 4 units in each building. Additionally, when multifamily properties are legally referred to, they generally mean apartment buildings.

Apartment complexes can also have more than one building on a single piece of property or plot of land. 

Townhouses

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. They can have multiple levels, but the homes can share a connecting wall in between each unit.

Townhouses are typically built in rows, usually in cities where land and real estate are at a premium. Because of the common walls, though, all owners function within a HOA that governs the entire property. 

Who Are Multifamily Properties For?

Multifamily properties may appeal to the following individuals:

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 4 or more separate units, busy investors can buy one property with multiple units within and devote time and energy into vetting the one property.

Multifamily homes up to 4 units make particularly good investments for beginner investors because they’re more easily financed than other rental properties. Investors just starting out can also utilize a popular real estate investment strategy called “house hacking,” 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.

Pros And Cons of Multifamily Housing

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.

Here are some pros and cons.

Pros

The biggest benefits to buying a multifamily home lie in the boost it could give your finances.

For multigenerational families, multifamily homes provide what single-family homes on separate plots of land 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.

Cons

Before you commit to your real estate investment, consider the drawbacks to owning a multifamily home.

Additionally, while there are tax benefits to having an investment property, you should also factor in the costs associated with being a landlord: maintenance, repairs and vacancies.

How To Buy A Multifamily Home

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 detached 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 owners’ 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 is to 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 earn cash flow through rental income. Multifamily homes are typically more expensive than their single-family counterparts to maintain, but they come with potential for rental income.

Interested in buying a multifamily home up to 4 units for investment purposes? Get started today.