BUYER’S ARTICLES – FOR THE SMART CONSUMER
For several decades, interest in purchasing multi-family homes seems to have decreased significantly. However, as younger people begin considering home ownership, owning multi-unit homes is becoming very popular among first-time buyers. Among the many advantages of multiple-family housing is the ability for the owner to live in one portion of the home, while covering the mortgage expenses with rental income from the other portion(s) of the home.
Interestingly, many multi-family homes are selling for the same asking prices as single family detached homes with similar features. However, when you are trying to purchase a multi-family home that will generate income, your lender will consider 75% of the anticipated rental income, on average, to be part of your income. You may therefore be able to buy a multi-family home that is significantly more expensive than the single-family home that you would otherwise be able to buy.
If you purchase a more expensive multi-family home, it is important to remember that you will be required to pay higher taxes on that home. Also, maintenance on a rental property can at times be quite extensive, particularly if your tenants turn out to be careless.
But don’t let the higher taxes and maintenance costs dissuade you from purchasing a multi-family property. You will quickly learn that, as a landlord, you will be able to use the interest paid on your mortgage loan, the property taxes and the costs of any updates or maintenance as tax deductions at the end of the year. In most cases, these deductions will easily offset the added costs.
Keep in mind that, as with any rental property, you do risk facing a month or two where your property may be unoccupied. You will need to be prepared to cover the costs in the event that one or more of your property units are empty for a short period of time. If you already know that your financial situation could not possibly support this loss of income, then you need to reconsider whether owning a multi-family home is a good idea for you.
Things to Consider When Thinking of Buying a Multi-Family Property
- Know ahead of time what type of multi-family property you are looking to purchase. If you are interested in living in one section of the property, keep that in mind as well and know your own space requirements.
- Find out what types of rental properties are popular in the area where you plan to buy. If duplex-style rentals are common and draw good market-value rental incomes, then this might be a good option for you. If condominium style housing is more popular, then you should keep your eyes open for this style of property. Pay attention to the local demand for rental properties.
- Realize that size matters. Space and size will influence the rental income and your ability to find qualified renters quickly. Depending on where you live, a one-bedroom unit may be more popular and rent out more quickly than a three-bedroom unit. A two-bedroom may be the most popular for singles that prefer to have home office space. Talk to your realtor and take the time to look around your neighborhood to assess current trends.
- Having a multi-family property with several small units will allow you to have multiple sources of income. Instead of just having one large rent check coming in, you could have several smaller ones. This means that if one unit is empty for a month or so, you will have less of a financial burden to cover.
- Know your budget ahead of time. If you buy a property that you can easily afford without relying on the anticipated rental income, then you are protecting yourself against many problems that could arise in the future. Remember that repairs and maintenance for a multifamily property will cost you about one-third of your monthly mortgage, and you must be prepared for these expenses, which could be considerable, depending on the extent of repairs needed.
Multi-Family Properties are ALL About Location
The highest demand for rental units is for those located in busy areas and within walking distance of shops, restaurants and large employers. While you may prefer the idea of living
several miles from the hustle and bustle of city life, chances are that renters would prefer to live closer to there they work and shop. Renters often prefer having access to public transportation. Therefore, in some cases you may need to give up the location that you desire so that your property will be more desirable to renters.
Locations near large employers like hospitals, universities, and large corporations are far more likely to attract potential renters. Keep in mind that students often prefer to share expenses within a small group. Therefore, if your property is large and can accommodate groups comfortably, you stand a good chance of keeping your rental units occupied.
Financing the Purchase of a Multi-Family Property
People who plan to buy a multi-family home that contains two or three units can use traditional financing programs to purchase the property. You would be required to make a minimum 3% down payment, or the standard 20% down payment. You can use one of many types of mortgages to purchase a multi-family property, including fixed-rate traditional mortgages, adjustable mortgages and even balloon mortgages to buy properties with one or two rental units.
If you plan to purchase a multi-family property that contains more units, you will probably be required to apply for commercial financing. The commercial lending process is entirely different from traditional mortgage funding for individuals. Therefore, you should discuss your options with a lender prior to deciding which type of property you plan to purchase.
The Advantages of Owning a Multi-Family Property
While reading the information above, you probably started to realize that there are many benefits to owning a multi-family property. As long as you are realistic in your expectations, there is a good chance that a multi-family will help you offset your housing costs while generating a small profit.
You will need to speak with a tax professional in order to determine the tax advantages of a multi-family property, because the rules vary by locale.
Buying a multi-family property is a good move for many first-time buyers who want to purchase a home while reducing their overhead costs and securing a new source of income. The process for finding a multi-family home is very much like the process used to find a traditional, single-family unit. You will need to research the available properties with careful scrutiny to identify your best options. Work with a realtor who has experience assisting in the purchase or sale of multi-family homes. By following these simple suggestions, you are sure to find the best possible multi-family property for your specific situation.
Consider your options carefully and be aware of the possibility that one or more of your rental units may be empty for some length of time. Careful budgeting and financial preparation will give you a definite advantage when you choose to purchase and rent out a multi-unit property.