I made a promise in the first edition of becoming landlord that I would give you the scoop on multifamily housing. If you are at all interested in getting the ball rolling on passive income through investment real estate the eventual question of purchasing a single family home vs. a duplex or triplex definitely pops up. So here are the key factors you’ll need to wade through when deciding which route is best for you.
Will you live in it? As I discussed last week, living in the property you purchase has crazy awesome benefits when becoming a landlord. You can come to the table with less money in hand if you haven’t been able to save the standard down payment amount, which for a multi-family home is 25-30%, which brings me to…
Do you have enough cash on hand? The first barrier to entry is certainly down payment. Stockpiling cash is crucial if you are going to take this leap. Living in your new investment property is always a plus. Banks are more likely to lend to an owner occupant and the all important cash on hand quandary becomes less of an issue.
-More cash flow. The main benefit in choosing a duplex, triplex, or quadruplex is that you’ll be making more money every month. Renting out three units as opposed to a single home is almost certain to help your bottom line and increase your cash flow.
-Less competition. When you are looking for single family homes you’ll be competing with other investors as well as folks looking for a home to live in. Multifamily homes are usually less desirable as a purchase and your competition is greatly decreased. That means you might find a better deal!
-Vacancies are easier to stomach. If you have a home with three units you won’t feel the heat as much when turnover occurs. It might start to feel a bit like Hells Kitchen with Gordon Ramsay breathing down your neck when your SFH (single family home) tenant moves out. You’ll need to have a financial cushion either way but the blow is certainly softer.
-Economies of scale. The main benefit of investing in a multifamily unit is the flexibility that economies of scale gives you. If you have repairs to do on your SFH between tenants you are making zero dollars. Not good or fun. Multifamily properties give you the added perk of being able to spruce things up in individual units without the burden of stomaching that mortgage payment all alone. The renters in the other units are carrying some of the slack for you.
-Harder to sell. That whole less competition thing comes back to bite you here. You might have struck a deal when you made the purchase but it is also going to be more difficult finding the right buyer for your investment property when the time comes for you to sell. The level of interest is going to be far lower than with a SFH.
-Less appreciation. As home prices skyrocket around the country (they certainly have in my neighborhood) you’ll see softer appreciation in your particular MFH. This should definitely be more of a long term play for you, not one you make in order to get rich quick. You should honestly plan on owning a MFH property for at least ten years and you should make your purchase based on creating more monthly income, not scoring big on the value of your home launching into the stratosphere.
-More maintenance. More units means more repairs. It doesn’t take a rocket scientist to figure that out. If you buy a triplex you could be on the hook for replacing or repairing three times the appliances! Are you ready for that? There is also more tenant turnover in MFH’s, which brings me to…
-Tenant quality. I hate to say this but I really must. SFH’s are more appealing to renters. If they can afford it they’ll choose one over a MFH nine out of ten times. You’ll need to go through the proper steps to make sure your place looks great and that you are screening the tenants properly, which I’ll expound on next week.
When you are looking around you’ll want to know if there are leases that accompany your new investment property. Some banks factor this into their lending equation while others don’t.
I hope these tips help you in your quest to becoming a landlord. Although I don’t yet own a MFH I plan on diversifying into that investment arena in the future. Just as owning stocks AND bonds in your investment portfolio is crucial, if you are planning on becoming a landlord with a few different properties, owning some of each is very beneficial. The added flexibility will be a nice plus over time.
Is a multifamily home in your future as a landlord?
[photos courtesy of Nate and gordonramsaysubmissions]
2 Comment responses
We have been thinking about buying multi family housing. It seems to be good way to invest in real estate.
Will this be your first investment property Michelle? Going with a MFH first is like jumping in the deep end as opposed to starting in the shallow end. However, knowing a bit about you, I think you can totally handle it!