For investors looking to invest in the long run, multi-family homes are considered a steady source of income and the road towards finally attaining some form of financial independence. As with investing in any other property out there, multi-family properties comes with its fair share of challenges. It’s a huge commitment that demands your time, energy, as well as your financial and emotional investments. If you know what you’re doing, this investment could prove to be fruitful in the long run. From large apartment complexes in the cities to small duplexes in towns, we’ll try to cover up as many of these common and popular questions you might have and keep you as informed as possible.
When we think of homes, the first thing that comes into mind is a single-family house surrounded by white-picket fences in a nice neighbourhood surrounded by other similar houses. A multi-family house is a bit more out of the ordinary minus the white picket fences and the privacy. These are usually what we consider apartment buildings including duplexes, triplexes, quadruplexes and townhomes. These buildings contain multiple residential units that can accommodate people including those wishing to rent out an apartment or a unit, be it, students, couples, or families. And in some cases, you might even find the property owner living in of the units as well.
Before we talk about multi-family properties, let’s talk a little bit about commercial real estate. Generally, commercial real estate is defined as any property that produces an income. Commercial real estate can be further subdivided into 6 categories; office, multi-family, retail, industrial, land and miscellaneous (that includes every other piece of property that generates an income). The names pretty much tell you everything you need to know about these commercial properties. But, multi-family homes can be a bit tricky because you can’t put them in a box. Any multi-family apartment complex with more than four storeys or 5+ units can be put in the commercial real estate category and these may include garden apartments, sprawlings apartment buildings and complexes or high-rise condominium units. Multi-family homes make for a great investment for newbies and they provide a steady income although they provide less stability in the long-run as compared to investments in office buildings.
With the current volatile market, many millennials are considering co-owning houses and properties. This practice is most common in Canada where close friends or relatives pool their incomes & resources for the opportunity to co-own a house or a property. As with any property, it more than just downpayments and mortgages, their maintenance, utilities, taxes, repairs and so on. When two families or parties co-own, they can equally share the burden of all these expenses. But one of the major downsides of co-owning is blind faith and trust. Both parties must go into this while they are 100% on board and trust each other to fulfil all their financial commitments. And try to partner up with someone whom you trust completely and whom you can depend on. I’ve seen this happen a lot, where many a time, due to unforeseen financial circumstances, one of the parties is unable to fulfil their end of the bargain and the rest of the burden including mortgage falls on the sole party. Most of the time, this ends up damaging their credit score. So, if you’re considering to co-own, get everything in writing, from all agreements to plans on selling the property in the future. And make sure all parties are 100% on board with the whole idea because many a time, things do get messy.
A Duplex consists of two living units with a common wall. These are a great investment and can provide a steady form of income. And yes, a duplex is considered a multi-family. Usually, when a family buys a duplex, they can live in one unit and rent out the other, making it a residential multi-family property. Whereas, when an investor buys a duplex, they rent out both units, which provides a steady form of income and is considered a commercial multi-family property.
Multi-family residences/properties consist of multiple living units where multiple families or individuals can live in each of those units. Let’s consider condominiums as large buildings or facilities with multiple housing units that are owned separately by each individual/family. Every unit’s owner has access to the same facilities and they monthly pay fees to cover those expenses, including maintenance. Condominiums can be considered a multi-family house with private owners for each unit/ apartment.
To put it simply, any multi-family property with four or fewer units are considered solely residential. Residential multi-family properties are a fantastic investment option to consider if you’re new to the game and this is because these properties usually have a lower down payment and there is a teeny bit of leniency with the mortgage as well. Whereas, the commercial multi-family property has five more than five housing units. These can be a bit pricey and I would highly recommend it to investors who are financially stable and can pay off the mortgage as well as the 25-30% down payment. These commercial multi-family properties can be a bit pricey and the downpayment & the mortgage remains the same even if the investor intends to occupy one of the units. But hey, commercial multi-family properties make for a great investment in the long-run and can ensure a steady income through rent.
A two-family house may also be considered a duplex. It is a house that has two separate units, side by side (vertically) that may be divided by a wall or it may be divided horizontally, where the two families may live on top of each other by occupying separate apartments. A duplex may also have two separate entrances and a single garage that can be shared by both the families. They may have one or two owners and these two-family houses/duplexes are considered a multi-family real estate.
To understand what a multi-generational home is, we first need to understand what a multi generational family is. The U.S. Census Bureau defines multi-generational families as those consisting of more than two generations of families, living under the same roof. Every multi-generational home comes in many different shapes and sizes so that they could accommodate and facilitate all the needs of the families living underneath the roof. For example, for a three-generation household (which is quite common than you think) has the grandparents, the parents and the kids. To accommodate these three generations, there has to be two master suites, and a mix of private and public rooms to meet everyone’s needs. In a four or five-generational household, there may be the parents, grandparents, great-grandparents, the adult children and their kids. This type of household would require at least 4 master suites with a variety of private and public rooms to suit the needs of every individual in the house. Usually, 6,000 to 10,000 square feet of property/house would be best suited for a large family as described above.
Living the American Dream surrounded and smothered by the people you love, that’s what a multi-generational house represents. A multi-generational house may come in different shapes and sizes to suit the needs of the family. Choosing a real estate broker who can understand the unique situation can play a huge role in helping you find the best home that’ll suit your needs and help bring peace and happiness in the home.
Like with every property out there, you need to educate yourself and do your research before considering investing in the property. The best way to go forward with buying a multi-family property is keeping yourself informed about the current market, the best locations, and you’ll have to step out there and take a look at many of the properties before narrowing down your search to just the one. Location, Location, LOCATION! Scout the location, make sure the neighbourhood has schools, malls, hospitals, restaurants in its vicinity. This just enhances the value of your property.
Secondly, the three professionals you NEED to successfully make the right choices are; an experienced real estate broker, a lender and an attorney. A real estate broker will help you make informed decisions when it comes to choosing the property and will guide and help you understand all those paperwork, along with an attorney. Find a lender in your state that offers multi-family property loans and has great customer services. They’ll also provide you with a pre-approval letter which is necessary if you’re considering making an offer on the property. After receiving your pre-approval letter, you can easily set up a budget for the property you’d like to buy.
Once you’ve narrowed down your search to “the One”, make yourself familiar with the vacancy/occupancy rate of the area, the rent roll, copies of leases and be sure to ask for detailed paperwork including income and expense statements for the previous and current years, service contracts and any other reports. Talk to the tenants of the property to get a more in-depth understanding of what you’re investing in.
Now, when it comes to making an offer on the multi-family property you’ve chosen, your real estate broker will carry the bulk of the burden and he’ll try to handle as much for you as possible. After you’ve presented your pre-approval letter and have made an offer, you’ll receive a financial commitment from your lender which is sort of like a pre-approval letter but, much more stronger than it. The lender may ask for applications, statements, contracts, leases, and property details before approving the loan. Your real estate broker will set up a closing date to close on the property, that is convenient for everyone. You need to have property and landlord insurance before the closing where both parties including you and the seller will sign the documents and you’ll finally receive the keys to your multi-family investment.
When it comes to buying a multi-family property, you’ll have to take a look at the type of property you plan on investing it. If it’s a residential multi-family property which has around 4 or fewer units, you’ll get access to the same residential mortgage loans as a single-family house. But, if it’s a commercial multi-family home with 5 or more units, you’ll face stricter qualifications and down payment policies; including a downpayment of approximately 25-30%.
If you’re looking into loans, there are conventional loans, FHA loans (Federal Housing Administration) and VA loans (Veterans Affairs). The issue with the last two loans is, if you aren’t occupying the multi-family property, you can’t qualify for the loans and can only apply for a conventional loan. FHA loans are the best if you’re an owner-occupant as these have low-interest rates, low down payment requirements, as less as 3.5% and the best choice to consider if you have a low credit score. If you’re someone who has a bad credit score around 500 or more, you are still eligible for the loan. All you have to do is pay 10% of the down payment upfront and get qualified for the loan.
If you’re a veteran, someone who works in the US military or has a spouse who works in the military, you are eligible for a VA loan. To apply for this loan, you don’t need to have mortgage insurance, and there are no down payments, that is, if you consider staying on the property. And the eligibility criteria are more lenient as compared to other loans as you don’t have to have a minimum credit score. And with conventional loans, you’ll need a downpayment of around 20%, which many a time can differ, depending on your lender. But remember, if your down payment is high, your monthly payment will be lowered and a bit more easy to pay off.
What does multi-family mean on Zillow?
As on every other real estate marketplace including Zillow, multi-family home or property means the same thing. A multi-family house is a property that has multiple units for multiple families or tenants. It could include duplexes, triplexes, condominiums, apartment buildings and so on. And depending on the number of units (as discussed above), they could either be commercial or residential.
Before considering investing in any property, or real estate, your main priority should be educating yourself about the market, the locations and everything else about the property and then, investing in an experienced Real Estate Broker, who’ll guide you and help you make an informed decision. There’s a lot of fish in the sea, so keep searching and don’t settle for less even if you can’t find the right multi-family house that is better suited to your needs.
Good Luck Multi-family Home Hunting!