What is a Multifamily Home? Everything You Need To Know

Last updated 03/19/2024 by

Summary:

A multifamily home is a structure designed for more than one family, such as an apartment complex or townhome. Owning one of these can add to your portfolio, bring rental income and cash flow, and even have some tax benefits. The owner of the property can live in one of the units if they choose to do so. It takes a lot of work to manage a multifamily property, but the payoff can be worth it.

If you’re a new real estate investor and want to build your real estate investment portfolio, consider purchasing a multifamily home. A multifamily home (also referred to as a multifamily property) is any residential building that has more than one unit to live in. These include townhomes, duplexes, apartment complexes, and semi-detached homes.

However, these properties require more work than single-family homes do. The upfront cost could be higher than many single-family homes. After purchasing, you have to oversee repairs, finances, and tenants. Being a landlord is a big commitment. Be sure to consider this before fully committing to buying a multi-family house.

What is multifamily housing?

A multi-family home is any residential property that has more than one housing unit. These can include duplexes, apartment buildings, or townhomes. Many real estate investors look into using multifamily properties as investment properties.

Multifamily properties can also be owner-occupied properties. Owner-occupied property refers to a property you rent and live on, which is also known as house hacking. The income they earn from tenants can help pay off the mortgage for the property. Owning a multifamily property is great for building your portfolio, cash flow, equity, and rental income.

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Types of multifamily housing

Depending on your financial situation or surroundings, you may be limited to one type of multifamily housing. We’ve listed a few common options below, along with noted benefits and features associated with each property.

	Definition	Features and Benefits
Apartment complex	An apartment building with multiple units inside. Most complexes include common areas such as a parking garage, playground, etc.	Great way to build cash flow and equity. However, maintenance and property management can be costly. You’ll have to handle more than one or two tenants, some of whom may not be the best to deal with.
Duplex	A two-story house consisting of two units. They usually share an outdoor entrance, with separate entrances inside.	Real estate investors can receive a greater cash flow by investing in a duplex. If you choose to buy a duplex, you could live in one unit and rent the other out. The other tenant’s rent could help cover some of the mortgage payments on the property.
Townhouse	A home built to house more than one family. It has two units that share at least one wall, and each unit has a separate entrance outside. Townhomes can be smaller than single-family homes.	Many townhouses are part of a homeowners association (HOA). If you choose to invest in a townhome, be sure to follow certain HOA requirements.
Semi-detached house	Similar to townhomes. A semi-detached home is a single-family home that shares a wall with another home.	Owning a semi-detached house is a great way to save money on mortgage payments and maintenance costs. But, they do come with less privacy than a single-family house would.

Each multifamily property has its pros and cons, but all are a great way to start building cash flow and credit in commercial real estate. A multifamily home is commercial if the property has more than five units, with anything less considered residential.

Investing in multifamily housing may sound intimidating at first, but it may turn into a lucrative plan. However, they can be expensive to finance. If you’re struggling to find the funds for a multifamily property, check out these home loan lenders. We’ve done the legwork so you can easily pick what’s right for you.

The Pros and Cons of Multifamily Homes

WEIGH THE RISKS AND BENEFITS

Here is a list of the benefits and drawbacks to consider.

What’s the difference between single- and multifamily homes?

There are a few important differences between multifamily and single-family homes, including what it takes to invest in them.

Mortgage. Multifamily properties with more than four properties are commercial properties. Because of this, you’ll need a commercial real estate loan to purchase such a property. If you’re new to real estate investing, you may need to make a 20% down payment.
Price. Single-family homes are usually less expensive than multi-family homes and are a solid way to begin your journey in real estate investing. However, the earning potential is higher with a multi-family home.
Risk. A single-family home is much easier to sell than a multifamily property. If you discover that managing multifamily properties isn’t for you, it could also be harder to back out.
Scalability. Scaling, earning a greater cash flow, and house hacking are all achievable with a multifamily home.
Unit and resident number. Only one family lives in a single-family home, whereas multifamily homes can have between two to four units and multiple residents.

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What do I look for when buying a multifamily home?

When considering a new property to purchase, there’s a lot to consider. We recommend reviewing the property’s budget, location, and previous property management company before buying a multifamily home.

Location. Where you live influences how easy it will be to find tenants, the property value, and how much you will charge for rent. Make sure the property is in a good location for renting out units.
Number of units. Consider the rent you would charge for each unit and budget accordingly. Learn how many units could remain empty before losing money.
Potential rental income. Be sure to factor in the cost of repairs when figuring out your budget, as this could impact your rental income.
Property’s seller. Make sure the person selling the property has kept up with repairs, overall acting as a good property manager.

Who are multifamily homes best for?

Owning multifamily homes is best for those interested in real estate investing and being a landlord. They’re also great for multi-generational families who want to live close together but have their own private living space.

Cost of multifamily homes

Before diving into this investment, understand the costs that come with a multifamily property. The mortgage values for multifamily homes have increased dramatically in recent years (as have price and interest rate indexes).

Costs include mortgage, property taxes, homeowners insurance, utilities, real estate agent fees, legal fees, and potentially advertisement fees. If you’re not careful, this could add up quickly to an overwhelming investment.

Key Takeaways

A multifamily home is any residential space that has more than one housing unit on the property.
Multifamily properties are duplexes, townhomes, apartment complexes, and semi-detached homes.
The initial cost of a multi-family home can be more expensive than a single-family home, but the earning potential is higher.
If you chose to lease out multifamily homes, you will also hold landlord duties.

Camilla Smoot

Camilla has a background in journalism and business communications. She specializes in writing complex information in understandable ways. She has written on a variety of topics including money, science, personal finance, politics, and more. Her work has been published in the HuffPost, KSL.com, Deseret News, and more.

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