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What to know about living and investing in a multifamily home

Yahoo Personal Finance· Getty Images
Jamela Adam
Updated 7 min read

Investing in a multifamily home is an excellent strategy for building wealth and generating passive income over time. However, as with any investment, it takes careful consideration and planning. And even if you're more interested in finding a place to call home than in an investment opportunity, there are a few things to consider before buying a multifamily house.

Before buying or investing in one, here’s what you should know about multifamily homes.

Learn more: What is a modular home?

In this article:

What is a multifamily home?

Pros and cons

How to get a mortgage for a multifamily home

What to consider when buying a multifamily home

FAQs

A multifamily home is any building that’s divided to accommodate multiple families. If you own a multifamily home, you can either live in one unit and rent out the rest or live elsewhere and rent out the entire multifamily property. If you don’t live in your multifamily home, you’re considered an investor, which can affect your financing options. We’ll touch on this more later.

The most common types of multifamily homes include apartment buildings, condominiums, duplexes, and townhomes. Here’s what you should know about each type.

  • Apartment. An apartment is a building with multiple housing units, and renters often share amenities like a swimming pool or playground.

  • Condominium. Condos are similar to apartments, but the most significant difference between them is ownership. An apartment is a rented residence, whereas condos are owned instead of rented.

  • Duplex. A duplex is a multifamily home with two units in the same building. Though these two units always share a common wall, they typically have their own entrances.

  • Townhome. A townhome is a multi-story building that shares an interior wall with neighboring units. The difference between a duplex and a townhouse is that a duplex is a single structure of two residences, generally side-by-side. In contrast, townhouses feature more than two residences with shared walls.

Read more: Should I buy a condo or a house?

Whether you’re considering purchasing a multifamily home to live in one of the units or for investment purposes, always consider its perks and downsides before taking the plunge.

  • More cash flow. Depending on the number of units you have and how much you charge for each, you could earn lucrative rental income to help make mortgage payments and cover housing costs. Over time, as you max out the capacity at your multifamily property, you could build multiple income streams that generate a nice profit.

  • A guaranteed place to live. While you don’t necessarily need to live onsite after purchasing a multifamily home, you could save a good chunk of change on housing by living in one of the units and renting out the rest.

  • More control over the property. Living in one of the units as a multifamily homeowner gives you greater control over property maintenance and repairs since you can address issues as soon as they pop up.

  • Tax benefits. If you own a multifamily home, you can deduct expenses such as the costs of repairs and the interest you pay on your mortgage as business expenses.

  • Faster investment portfolio growth. If you want to build an extensive portfolio of rental units, acquiring a 10-unit multifamily property is much more time-efficient than buying 10 single-family homes and taking out 10 separate mortgages for each property.

Dig deeper: Best mortgage lenders for first-time home buyers

  • Higher turnovers. Since multifamily homes have several units, the turnover rate is usually higher than single-family homes. This can be inconvenient since you may spend more time scheduling tours and processing paperwork.

  • High up-front costs. A larger multifamily property is typically more expensive than a single-family house. So, while these property types have the potential to become money-making machines once you get them up and running, they also come with a high barrier to entry, such as a larger down payment.

  • More responsibilities. Becoming a landlord is a big commitment. More units mean more tenants, which means more maintenance and upkeep to keep everything running smoothly. And if you live onsite, expect to be on call and ready to address any tenant issues.

  • Growing property insurance rates. According to the 2023 State of Multifamily Risk Survey and Report, multifamily property insurance costs have increased an average of 26% over the past 12 months.

Read more: What is a co-op, and how does the financing work?

Getting a mortgage for a multifamily property may look different depending on whether you plan to live on-site and how many units the property has.

You can typically use an FHA, VA, or conventional loan to finance an owner-occupant property with four or fewer units. But if it has more than four units, you have to get a commercial real estate loan rather than a residential one. You’ll also have to get a commercial loan if you don’t live in one of the units. Commercial mortgages have different terms than residential mortgages, and you can apply for them through a bank, credit union, or online lender.

Getting a mortgage for a multifamily property is similar to getting one for a single-family home. You must meet your potential lender's requirements for debt-to-income ratio, credit score, and other financial criteria. To get an idea of how much house you can afford, get prequalified by at least three mortgage lenders before you start property hunting.

Read more: What is manufactured housing?

Buying a multifamily home is a big deal. Here are a few things to consider to ensure you're making the right call.

Before signing on the dotted line, evaluate the rental market in the area to make sure there’s sufficient demand for you to generate a positive return on your investment. Here are a few questions you can ask your real estate agent to help you better understand the rental property scene in the neighborhood:

  • What is the occupancy rate of nearby rentals?

  • What is the rental history of this property?

  • Are there any current or planned development projects in the area?

Learn more: Want to build an accessible dwelling unit (ADU)? Here’s how to finance it.

Aside from the obvious, such as visible mold and water damage, take the time to schedule a home inspection to identify more subtle issues that could be hazards, such as electrical or structural problems. Buying a multifamily home in rough shape doesn't just hurt your wallet. It's a recipe for tenant troubles and endless headaches.

"Location, location, location" might sound cliché, but it's a golden rule for home buyers.

To get a better picture of a property’s location and surrounding area, consider walkability ratings, the crime rate, the school district, the local housing market, and future projects planned for the area.

Read more: Modular versus manufactured homes

Zoning refers to the local laws that govern how you can use property in a certain area, dictating what you can build and how you may use land. Before purchasing a multifamily home, familiarize yourself with the local zoning laws that could affect your plans for the property. Remember, ignoring zoning laws can land you in hot water and lead to costly fines and legal trouble. Check your local government’s website for more information on zoning laws in your area.

Learn more: How to finance a tiny home

Whether a duplex or an apartment is better boils down to your personal preferences. Duplexes offer more privacy and space, but apartments typically have more amenities and conveniences. If you’re deciding between duplexes and apartment complexes as investment options, duplexes may be more cost-effective and beginner-friendly.

Living in a multifamily home allows you, as the owner, to rent out the other units to generate regular and passive income. It’s one way to diversify your income streams and build wealth through real estate. Plus, you have the flexibility to choose your neighbors.

A single-family home is intended for one family to live in at a time, while multifamily properties have separate units designed for two or more families. Though both property types can be good sources for building wealth, a multifamily home is an even stronger real estate investment property since you can have tenants — though the costs for maintenance and repairs may also be higher.

This article was edited by Laura Grace Tarpley