Whether shopping for a home or an investment property, buyers may come across multifamily homes. The first need-to-know, especially for financing’s sake, is that multifamily properties with two to four units are generally considered residential buildings, and those with five or more units are commercial.
This guide explains whether multifamily homes are a good idea for homebuyers or investors.
Table of Contents
Key Points
• In a multifamily home, each unit has its own utilities, entrance, and legal address, while an accessory dwelling unit (ADU) doesn’t.
• As an investment, multifamily homes can provide you with reliable cash flow from multiple rental units and a quick way for you to scale your real estate portfolio.
• When you purchase a property as your residence, you can use rental income to offset your everyday costs, and you may qualify for more attractive financing options, such as FHA or VA loans.
• Challenges can include higher upfront costs, the burden of managing multiple units and tenants (which may require hiring a property manager), and less privacy if you’re an owner-occupant.
• Before you buy, you should assess your potential rental income compared to expenses, check the property’s proximity to amenities, and evaluate your local rental market’s vacancy rate.
What Is a Multifamily Home?
Put simply, a multifamily home is in a building that can accommodate more than one family in separate living spaces. Each unit usually has its own bathroom, kitchen, utility meter, entrance, and legal address.
Of the more than 45 million American households that rent, around 60.4% live in multifamily buildings.
Among the different house types are duplexes, which contain two dwelling units, while a triplex and quadruplex consist of three and four units, respectively. A high-rise apartment building is considered a multifamily property.
What about ADUs? A home with an ADU — a private living space within the home or on the same property — might be classified as a one-unit property with an accessory unit, not a two-family property, if the ADU doesn’t have its own utilities and provides living space to a family member.
Multifamily Homes vs Single-Family Homes
On the surface, the differences in property types may seem as straightforward as the number of residential units. But there are other considerations to factor in when comparing single-family vs. multifamily homes as a homebuyer or investor.
Unless you plan to hire a manager, owning a property requires considerable time and work. With either type of property, it’s important to think about how much time you’re able to commit to handling repairs and dealing with tenants.
If you’re weighing your options, here’s what you need to know about single-family and multifamily homes.
| Multifamily Homes | Single-Family Homes |
|---|---|
| Comprise about 60.4% of U.S. rental housing stock. | Represent around 31% of U.S. rental housing stock. |
| Can be more difficult to sell due to higher average cost and smaller market share. | Bigger pool of potential buyers when you’re ready to sell. |
| Higher tenant turnover and vacancy can increase costs. | Often cheaper to purchase but higher cost per unit than multifamily. |
| More potential for cash flow and rental income with multiple units | Generally less cash flow if renting out. |
| Usually more expensive to buy, but lower purchase cost per unit. | More space and privacy. |
| Small multifamily homes (2-4 units) may be eligible for traditional financing, while 5+ units generally require a commercial real estate loan. | Greater range of financing options, including government and conventional loans. |
Pros and Cons of Multifamily Homes
There are a number of reasons to buy a multifamily home: Rental income and portfolio expansion are two.
Buying real estate is one ticket to building generational wealth. But there are also downsides to be aware of, especially if you plan to purchase a multifamily home as your own residence.
So what are multifamily homes’ pros and cons? That can depend on whether it’s an investment property or a personal residence.
As Investment
Investing in multifamily homes can come with challenges. Take financing.
A mortgage loan for an investment property tends to have a slightly higher interest rate and stricter qualifications, and a down payment of 20% or more is usually required, though there are ways to buy a multifamily property with no money down.
Government-backed residential loans don’t apply to non-owner-occupied property, but there are commercial FHA loans for different situations:
• Purchasing or refinancing apartment buildings with at least five units that don’t need substantial rehabilitation
• New construction or substantial rehabilitation of rental or cooperative housing of at least five units for moderate-income families, elderly people, and people with disabilities
• Residential care facilities
Upfront and annual mortgage insurance premiums (MIP) apply.
Before adding a multifamily home to your real estate portfolio, take note of the pros and cons of this investment strategy.
| Pros of Investing in Multifamily Homes | Cons of Investing in Multifamily Homes |
|---|---|
| Reliable cash flow from multiple rental units. | Upfront expenses can be cost-prohibitive for new investors. |
| Helpful for scaling a real estate portfolio more quickly. | Managing multiple units can be burdensome and may require hiring a property manager. |
| Opportunity for tax benefits, such as deductions for repairs and depreciation. | Property taxes and insurance rates can be high. |
| Often appreciates over time. |
As Residence
Buyers can choose to purchase a multifamily home as their own residence. They’ll live in one of the units in an owner-occupied multifamily home while renting out the others.
Owners can use rental income to offset the cost of the mortgage, property taxes, and homeowners insurance while building wealth.
Another advantage is financing. With a multifamily home of 2-4 units, an owner-occupant may qualify for an FHA, a VA, or a conventional loan and put nothing down for a VA loan and little down for a conventional or FHA loan. (However, most VA loans require a one-time funding fee, FHA loans always come with MIP, and putting less than 20% down on a conventional loan for an owner-occupied property, short of a piggyback loan or lender-paid mortgage insurance, means paying private mortgage insurance.)
What are multifamily homes’ pros and cons as residences?
| Pros of Multifamily Homes as a Residence | Cons of Multifamily Homes as a Residence |
|---|---|
| Reduced cost of living frees up cash for other expenses, investments, or savings. | Vacancies can disrupt cash flow and require the owner to cover gaps in rent. |
| Self-managing the property lowers costs and can be more convenient when living on-site. | Being a landlord can be time-consuming and complicate relationships with tenant neighbors. |
| Potential for federal and state tax deductions. | Less privacy when sharing a backyard, driveway, or foyer with tenants. |
| Owner-occupied properties qualify for more attractive financing terms than investment properties. |
It’s worth noting that an owner-occupant can move to a new residence later on and keep the multifamily home as an investment property. This strategy can help lower the barrier to entry for real estate investing, but keep in mind that loan terms may require at least one year of continued occupancy.
Recommended: Tips to Qualify for a Mortgage
Who Are Multifamily Homes Right For?
There are several reasons homebuyers and investors might want a multifamily home.
Multifamily homes can help you enter the real estate investment business or diversify a larger portfolio. It’s important to have the time to commit to being a landlord or the money to pay for a property manager.
For homebuyers in high-priced urban locations, multifamily homes may be more affordable than single-family homes, given the potential for rental income. It might be helpful to crunch some numbers with a mortgage payment calculator.
Multigenerational families who want to live together but maintain some privacy may favor buying a duplex or other type of multifamily home.
What to Look for When Buying a Multifamily Home
There are certain characteristics to factor in when shopping for a multifamily home.
First off, assess what you can realistically earn in rental income from each unit in comparison to your estimated mortgage payment, taxes, and maintenance costs. Besides what the current owner reports in rent, you can look at comparable rental listings in the neighborhood.
When looking at properties, location matters. Proximity to amenities, school rankings, and transportation access can affect a multifamily home’s rental value.
The rental market saturation is another important consideration. Buying a multifamily home in a fast-growing rental market means there are plenty of renters to keep prices up and units filled. The vacancy rate — the percentage of time units are unoccupied during a given year — of a property or neighborhood is an effective way to estimate rental housing demand.
Depending on your financing, the condition of a multifamily home may be critical. With a VA or FHA loan, for instance, chipped paint or a faulty roof could be a dealbreaker.
Read up on mortgage basics to learn about what home loans you might use for a multifamily home and their terms.
Finding Multifamily Homes
Like single-family homes, multifamily homes are featured on multiple listing services and real estate websites. Browsing rental listings during your multifamily home search can help gauge the market in terms of vacancy rates and rental pricing.
Working with a buyer’s agent who specializes in multifamily homes can also help narrow your search and focus on in-demand neighborhoods.
Alternatively, you can look into buying a foreclosed home. This may help you get a deal, but it’s not uncommon for foreclosed properties to require renovations and investment.
The Takeaway
Buying a multifamily home as a residence or investment property can provide rental income and build wealth. It’s also a major financial decision. Whether you’re planning to be an owner-occupant will affect your financing, so seriously consider this option and run the numbers to see if you stand to recoup your costs — and ideally make a profit — from the building’s rental income.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
FAQ
What is the difference between residential and multifamily?
Some multifamily homes — those with fewer than five units — are considered residential real estate. Larger properties with more than five units are commercial real estate.
What financing options are available for multifamily properties?
Multifamily homes with 2-4 units are often eligible for residential financing, such as conventional, FHA, or VA loans, especially if you plan to be an owner-occupant. Properties with five or more units are generally classified as commercial and require a commercial real estate loan or specific commercial FHA loans.
How long do I need to occupy an owner-occupied multifamily home?
As an owner-occupant, you can eventually move out and convert the property to an investment. However, loan terms typically require at least one year of continued occupancy.
Photo credit: iStock/krzysiek73
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