What to Consider When Buying a Multifamily House
If you’re considering buying a home, opting for a duplex or a multifamily house and renting one side out may seem like a simple way to cut down on mortgage costs. While it can make a property more affordable by covering a portion of the mortgage each month, there are a number of factors to consider before making such a decision. Multifamily properties are different from single-family homes, and renting out a portion of the property can complicate the buying process. Think about the following impacts of opting for multifamily before making such a purchase:
Typically, two-family (or more) homes are more expensive than single-family homes. This is especially true when they are equipped with amenities suitable for multi-family living like double garages or driveways. Be prepared to spend a little more for this type of investment.
When dealing with financing a new home, you might run into unique challenges when opting for a duplex or multifamily property. Just as with a single-family home, you will still need to have good credit and a low debt-to-income ratio to get financing from mortgage lenders. Additionally, lenders typically require a larger down payment, sometimes upwards of 25%, for multifamily housing. That can be a considerable difference in cash compared to a single-family house, so be prepared to make that extra investment.
Of course, location is always important for choosing any property to invest in. You not only need to consider what location is desirable for you, but what location is desirable for potential tenants. Having a property in an attractive location is extremely important for your future ease of renting and minimizing vacancies.
Additionally, the property location may impose additional challenges when it comes to multifamily. Multifamily housing is categorized as any residential property other than a single-family home. Many neighborhoods do not allow multifamily housing of any kind due to zoning laws. Be sure to confirm that the neighborhood you’re looking in is zoned for multifamily properties, and double check with the HOA if there is one. Typically, more urban areas will have more multifamily housing units, but some suburban areas may have town-homes as well.
The most important consideration to make for any rental property investment is vacancy expenses. A property will never be rented 100% of the time, and any time that the property is vacant, you must cover the entire mortgage payment. Expect to have latency between tenants while you are marketing the property, and prepare for lease terminations or even evictions. If you don’t have the finances to handle these potential losses, then a multifamily property isn’t a smart investment.
5. Property Management
When you invest in a rental property, you take on the full responsibility of being a landlord. This might seem easy when you live next door to your tenants, but it’s still a full-on job. You have to handle property marketing, tenant screening, lease agreements, property maintenance and repairs, responding to tenant concerns, and last but not least, rent collection. Late payments or nonpayments can significantly impact your cash flow, and evictions can require legal assistance and months of your precious time.
If you’re not prepared to take on the role of landlord, you’ll need to hire someone. Even for a single property, it can be beneficial and cost-effective to hire a property manager. At Utopia Management, we maximize your return on investment by reducing vacancies, finding high quality tenants, and offering unbeatable rates on maintenance and contract work.
Once you choose to manage a rental property, your tax return becomes a bit more complicated. The IRS has an entire publication (527) dedicated to residential rental property rules and regulations. In order to make sure you’re not breaking any rules, you should familiarize yourself with the whole publication. It covers rental income and expenses, reporting requirements, depreciation, and rules concerning personal use of the property. Your tax report will need an entirely new schedule called “Supplemental Income and Loss”.
While owning a rental may make filing taxes more complex, there are some benefits as well. You will be able to write off certain expenses that are connected to your rental income.
7. Privacy and Lifestyle
Of course, opting for a two-family property will sacrifice some privacy over a single family home. You might find that your tenants stop by often with questions or problems about their rental home. As a landlord, being so accessible can be a detriment, as it is your responsibility to respond to tenant concerns. You also may find that sharing walls with another family is problematic; keep in mind that you might be able to hear them, and they might be able to hear you.
When the time comes to sell the property, selling a multifamily home can be a greater challenge than with single-family housing. The market for two-family homes is significantly smaller, so it may take much longer to find a buyer.
Additionally, you must consider your tenants’ rights if the property is not vacant when you want to sell. Selling a non-vacant rental property requires thorough communication with the tenants and the potential buyers, as they also need to know the full details of the rental agreement. Selling rental properties is generally much simpler during vacancy. Altogether, keep in mind that it may not be immediately possible to resell the property in the future.