Explore your mortgage options
Ready To Buy a Home?
Get Approved to Buy a Home
Rocket Mortgage® lets you get to house hunting sooner.
Multifamily homes have been increasing in demand. According to the National Association of Home Builders, construction of these homes exceeded 500,000 units in 2022 – the first time that’s happened since the Great Recession.
While that number is expected to come down in 2023, investing in a multifamily home remains a viable, potentially lucrative path to homeownership.
In this article, we’ll explain exactly what we mean by “multifamily home,” the pros and cons of investing in one and special considerations to make before doing so.
What Is a Multifamily Home?
A multifamily home is a property that’s been constructed to provide private living spaces for separate residents. The term refers to the layout of the home, not ownership status.
For example, if you pay rent for an apartment, that’s still a multifamily home – even if nobody living there owns their apartment unit.
We’ll go over the different types of multifamily homes, but as a category, both a duplex and an apartment building with hundreds of units would count.
The owner of a multifamily home has the option to live in one of the units and rent the rest of them out, or rent all of them out. Rental income can offset the cost of the mortgage, making it an appealing option – even for first-time home buyers.
Types of Multifamily Homes
Here are the most common types of multifamily homes.
This is the classic example many people think of when it comes to multifamily homes. A duplex consists of two living units under the same roof. Each unit must have its own entrance and living space, and they usually share a wall. However, the entire building and both units fall under one property title.
These are similar to duplex homes, but a triplex has three units, and a fourplex has four. Again, each unit must have its own entrance and living space. These units are usually larger than duplexes and are found on larger lots due to the increased number of residents.
These are similar to duplexes in that there are two living units, each with their own entrance. However, semi-detached homes are usually larger, and each unit has its own title – which isn’t the case with a duplex.
Townhouses classify as multifamily homes because they’re usually a unit within a building that includes other units. Practically, however, you have less rental opportunity if you only own one unit in the building.
These are individual units within a building that’s composed of multiple units. Apartments and condos are extremely similar. The general rule of thumb is if it’s rented, it’s an apartment, and if it’s owned, it’s a condo.
Pros and Cons of Multifamily Homes
A lot of potential upsides come with investing in multifamily homes. However, there are some specific drawbacks with these properties to be aware of as well.
We’ve compiled a list of both to help you decide if the risks make sense for your individual circumstances.
- Rental income: One of the biggest perks is the ability to rent out units in a multifamily home. Rental properties can increase your cash flow and help you pay off the mortgage. This additional income might help you afford something you couldn’t otherwise.
- Investment diversification: Investing in real estate gives you the opportunity to build equity. This can increase your wealth and diversify your investments, mitigating the risk of putting too many eggs into one basket.
- Timely repairs: If you live in the home you rent out, you’ll have a first-row seat to what’s going on. This could have the incidental effect of making renters take better care of the property. And in instances where things go wrong, you’ll be right there to investigate any issues and make arrangements for repairs.
- Tax benefits: Usually, these come in the form of different write-offs available to you, like writing off home repair expenses or the mortgage interest you pay.
Take the first step toward buying a home.
Get approved. See what you qualify for. Start house hunting.
- Higher cost: Because these properties are big enough to include multiple living units, they usually come with a higher price tag than single-family homes.
- Landlord duties: If you decide to rent out units, you become a landlord. This comes with its own headaches, including screening tenants, collecting rent and managing repairs for the entire property.
- Tenant turnover and vacancies: Change is constant with rental properties. You could have great, responsible tenants one year, only for them to move out and be replaced by irresponsible ones. And while rental income can offset costs, you must also be prepared for the possibility of units sitting empty and not generating income if you can’t rent them out.
- Limited privacy: If you’re a landlord who lives in the same building as your renters, you may have less privacy. In addition to sharing walls, renters know where to find you if there are issues that need to be resolved.
How To Finance a Multifamily Home
Buying a home is a huge financial commitment, and most people don’t have the cash on hand to buy one outright.
If you’re still interested in investing in a multifamily home after weighing the benefits and drawbacks, there are a few different financing avenues you can pursue.
The links below will tell you more about each loan type and the qualification requirements.
- Conventional loan
- Federal Housing Administration (FHA) loan
- U.S. Department of Veterans Affairs (VA) loan
- U.S. Department of Agriculture (USDA) loan
We also recommend that you reach out to a mortgage lender to talk through your options with an expert.
Need Mortgage Help?
New home, second home, refinancing, we’ve seen it all. Whatever your goals, expert help is just a click away.
Questions To Ask Before Investing in a Multifamily Home
A lot of nuance goes into owning a multifamily home. We’ve put together some questions to ask yourself before committing to the process to give you a better idea of what you’d be getting into.
Are you ready to be a landlord?
Being a landlord is probably the biggest difference between owning a multifamily home and a single-family property. Be honest with yourself. Are you ready to take on the extra responsibility?
Remember: Unless you buy a home with tenants already, you’ll need to handle the advertising and screening of potential renters. That’s a lot of work before they even move in. If you don’t have the ability or bandwidth to handle it, other types of investing might make more sense.
What is your plan for property management?
Things will go wrong when you purchase a property. That’s okay – so long as you have a plan to fix it. Are you handy enough to attempt some repairs yourself, or will you be relying on professional help?
Make a plan for what you’ll do if there’s a problem with an appliance before you need it.
There’s also the question of how you’ll go about collecting rent. How will you handle the transfer of funds? What happens if a tenant falls behind on rent?
These are all important questions to ask yourself before situations arise. Many landlords opt to work with property management companies. While this can eat into your overall profits, these companies can take care of many potential headaches.
Can you afford the home if it remains vacant for an extended period?
The math on multifamily homes can be extremely favorable to the owner – as long as the units are rented out. But what happens if you need to cover the entire mortgage for a few months?
Make sure that even if the unit(s) you plan to rent out are vacant longer than expected, you can still cover the monthly mortgage payment.
Yes, they can be. Multifamily homes can allow first-time home buyers to offset the cost of the mortgage by renting out extra units while living there. This allows you to build equity and might help you afford a home you otherwise wouldn’t have been able to.
This depends on the type of loan you’re taking out and whether you plan to live there. If the property will be your primary residence, you’ll owe less than if you plan to use it strictly as an investment property.
Yes, but you’ll be required to meet the down payment requirements for an investment property. Most mortgage lenders will require at least a 15% down payment.
Final Thoughts on Multifamily Homes
Many people think of multifamily homes strictly as investment properties, but they can be terrific options for first-time home buyers as well. There’s a lot of upside, especially if you don’t mind the additional work that comes with being a landlord.
Just make sure you’re prepared to shoulder the additional responsibility and that you have a plan in case the units are harder to rent out than you expected.
Home is worth it.
Take the first step toward owning a home. You’ll be glad you did.
The Short Version
- A multifamily home is a property that’s been constructed to provide private living spaces for separate residents
- Pros of investing in a multifamily home include potential rental income and investment diversification. Cons include a higher upfront cost and landlord duties
- There are several financing options available for multifamily homes, including conventional loans, FHA loans, VA loans and USDA loans
National Association of Home Builders. “Multifamily Housing Market to Weaken in 2023, While Remodeling Market to Remain Solid.” Retrieved July 2023 from https://www.nahb.org/news-and-economics/press-releases/2023/01/multifamily-housing-market-to-weaken-in-2023