What Is A Multi-Family Home? A Complete Guide For Beginners
People live (and invest) in all types of homes. One type that is prominent in many areas are multi-family homes. But what is a multi-family home exactly? It is a single building designed to house more than one family, each living separately. Common ones include duplexes (which have two units) and small apartment buildings that may house four or six families. Each unit typically has its own complete living spaces that include kitchens, bathrooms, and separate entrances.
As both a living option and an investment, multi-family homes can provide an interesting avenue for many people. As one of the top property management companies in Boston, we have seen our fair share of multi-family homes used as effective investments. But it is important to examine the different types, benefits, challenges, and financial considerations of multi-family homes in order to best determine if this investment is right for you. Let’s jump in and explore.
Table of Contents
- What Is A Multi-Family Home? Different Types
- Benefits and Challenges to Multi-Family Homes
- Financial Considerations
- Get Help Managing Your Multi-Family Home
What Is A Multi-Family Home? Different Types
While multi-family homes is a type of housing, there are further types of within this classification. Some types of common in certain areas versus other areas, which may just be the popularity of a certain time during a certain time period. Each have their own unique benefits and considerations when looking over multi-family real estate and investing options.
Apartments
These are typically the most common multi-family homes, since they encompass most multi-family homes that don’t fall under the other categories. Apartments are properties that rent out to residents, which can range from smaller affordable housing to luxurious units full of expensive amenities. These may share an entrance or not, and generally can take many forms and shapes.
Duplexes-Triplexes
These are similar to apartments, but they consist of only two (duplex) or three (triplex) units. Each have their own entrance, but they share a roof. They are common in certain areas or neighborhoods, and in some cases they can be converted to a single-family home or a single-family home can be converted into one. In some cases owners might decide to live in one of the units while renting out the other units. While sometimes the units are equal, in other cases a unit might be larger or have more amenities than the other units.
Townhomes
A townhome is defined by the layout of the housing. These homes are multi-story and have separate entrances, so each unit has multiple levels. It is a style of multi-family homes that are quite popular in certain areas.
Condos
As opposed to rental apartment types, condos are generally considered owner-occupied units. So they are multi-family buildings, but each family owns or leases the unit they are in. Although there are cases where condos are rented to others.
Mixed Use Development
Any properties that combine residential and commercial (and sometimes recreational) spaces in a single project are considered mixed use development. In the context of multi-family homes, this means a property that integrates rentals or condos with commercial property such as shops, restaurants, or offices. In busy areas, you might find the first floor lined with shops and other businesses while upper levels are residential units such as apartments.
Student and Age Restricted Communities
There are other categories of multi-family homes that are defined by the type of residents they are intended for. Housing that is typically near colleges that have unique amenities that cater to students might be considered student housing. Similarly, senior living communities are a certain type as well. It is important to investigate these types of housing individually, since fair housing regulations and laws in Massachusetts and other states dictate how age and other factors can be used for rental property.
Benefits and Challenges to Multi-Family Homes
Like any real estate investment, multi-family homes come with their own unique pros and cons. Multi-family real estate investing is a choice that some people find lucrative and others might find difficult to manage given the intricacies. So let’s explore some of the benefits and challenges.
Some of the likely benefits include:
- Cash Flow – In some ways multi-family homes help by diversifying the cash flow over more property. Owning more units means not taking too much of a financial hit when any one unit is vacant for a period of time. Spreading yourself over multiple units means allowing for continual cash flow if there are gaps in renters at any point.
- Passive Income – Multi-family real estate isn’t entirely passive income, but sometimes it can be nearly so. If you take advantage of property management services such as with Bay Management Group, you may find that multi-family investing can be quite passive and easy compared to other real estate investing. That sounds nice, doesn’t it?
- Scalability – Another benefit to multi-family housing is that you can start smart and expand from there. You can begin with a duplex or other small apartment complex, and then as you learn and develop the skills and capital for such an investment, you can expand from there.
- Tax Benefits – There are a number of tax benefits that you can learn about and take advantage of. For example, you can deduct the depreciation of the property over time, which reduces your taxable income. This is a non-cash deduction, meaning it doesn’t affect your cash flow. Also, the interest paid on the mortgage for the property is tax-deductible, which can significantly reduce your taxable income. There are also property tax deductions and other tax benefits that you can learn about as you go.
Ease of Financing – For a number of reasons, banks oftentimes do not find multi-family homes as risky as other investments. One of the reasons being the cash flow benefits as described above. They tend to find that there is less risk when spread out over many units. There are other factors such as the fact that foreclosure rates are traditionally not as high on multi-family homes. Because of these reasons and more, compared to other investments, banks and financial institutions tend to think favorably on financing these types of properties.
How about some of the challenges of owning multi-family homes? Here are a few:
- Higher Expense – Purchasing a larger property typically just means a higher expense. This may involve the initial capital that is needed for this type of investment.
- Management Issues – Managing multi-family homes isn’t always hassle-free. While hiring professionals to manage the property would certainly help, if you choose to manage the properties yourself, there could be all kinds of everyday issues that arise in the basic management of the unites and properties.
- Higher Maintenance Cost – Maintenance costs are a factor. It isn’t surprising that maintenance costs for a building full of multiple units would be more than a single-family home. Along with that, multi-family homes often come with amenities such as common rooms, pools, and security features that have their own costs.
- Competitive Market – Depending on your plan, there could be a competitive market for such multi-family homes that you are considering. While you may see all the money can be made on the investment, it is a good bet that others also see that and are trying to get in on the same action.
Financial Considerations
Considering a multi-family home is a large decision. There are many financial considerations to weigh before going down that path. First, it is crucial to make sure that the potential cash flow you’re expecting on the investment accounts for not only mortgage payments, but also property taxes, insurance, and the inevitable maintenance costs.
Secondly, the location of the property is a major factor, so make sure you know the area and the intricacies of that area well. Coming into a city, state, or even neighborhood and making assumptions about property values and the market could be problematic.
Finally, it helps to understand the tax implications and benefits, such as depreciation and deductions for mortgage interest and property taxes. They can help with the bottom line, while at the same time, they can be complicated. You can consider consulting with a financial advisor or real estate expert to help you navigate and make informed decisions.
Get Help Managing Your Multi-Family Home
Getting help with the day-to-day of managing a multi-family property is something you should consider early in the decision making. Consider Bay Management Group for the job!
By choosing to partner with us, we act as a bridge between you and your tenants. With managing the complexities of multi-family properties, that can be a live saver. Our dedicated team of leasing agents and property managers are with you through every step of the process, helping you get the most from your rental investment. Contact us today for a free rental analysis and see how professional property management services can help!
