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Owning a Multi-Family Home

street view of a duplex home
September 24 2021 • by Marissa Scott • Home Ownership


Housing is one of the largest monthly expenses for most Americans, whether it takes the form of rent or a mortgage payment. While there are circumstances where renting may make the most sense for some, home ownership is typically viewed as a wise financial investment. For many, this investment means a single family home that they’ll live in themselves, but another option to consider is a multi-family home. A multi-family home can take many forms, such as a townhouse, duplex, or apartment building, and it has the potential to create a steady income for you.

However, like any major financial decision, it’s important to consider everything involved before investing in a multi-family home. Let’s take a closer look at some of the pros and cons of multi-family home ownership.

 

Potential Benefits of Purchasing a Multi-Family Home

 

•    Can make mortgage payments more affordable. While purchasing a home is often a solid step toward financial security, a monthly mortgage payment can be daunting, especially with home prices currently so high. In some cases, buying a multi-family home instead of a single family can help to make mortgage payments more affordable. For example, if you can purchase a property that has two or more separate living areas, you can live in one unit while generating income by renting out the others. That income can go toward your monthly mortgage payment, reducing your own personal housing burden. Depending on the value of the home, the area it’s located in, and the amenities it has to offer, you may even be able to cover your entire monthly mortgage payment with the money generated from your rental units.

•    Can bring in more income over time. Generating revenue from your home can benefit you down the road as well. As your home increases in value, or area rent prices go up, you could potentially bring in more monthly income. This could allow you to put more towards your personal savings, or allow you to pay down your mortgage faster. There are often tax benefits of owning a multi-family home as well. Although it may be an adjustment to share a wall or ceiling with your tenants, the long-term benefits may make it worthwhile.

What to Consider

•    What will make a good home, and a good investment? If you are going to live in one of the units, you’ll need to find a property that meets all of your own “must-haves”. You should consider the things important to you and your family such as location, layout, yard space, and more. However, since you’ll also need to attract tenants to occupy the other units, you’ll need to consider the rental market as well. What is the average monthly rent in the areas you’re thinking of buying? Is there a high demand for rentals there? At times, it can be challenging to balance your own personal housing preferences with rental concerns. For example, you may want to buy in a rural area, but doing so could make it harder to find tenants. Of course, it’s also possible to purchase a multi-family property that you don’t intend to live in. If you can afford to buy a second “income property”, there can be many potential financial benefits of owning rental property along with your own home.

•    Will the investment make financial sense? Before purchasing a multi-family property, dig into the numbers to evaluate whether or not the property will be profitable for you. To do so, you should get a sense of your expected monthly cash flow from the property (in other words, the rents you will receive from tenants), as well as any expenses that will go into purchasing, maintaining and managing the property. Luckily, there are many online tools to aid in this assessment. Some things to keep in mind when analyzing the potential financial impact of a multi-family property include:

o    The purchase price of the home
o    Monthly mortgage costs
o    Closing costs
o    Remodeling costs if needed
o    Rental income projections
o    Potential income loss if the rental unit is vacant for certain periods
o    Operating expenses (property tax, insurance, maintenance, etc.)
o    Assumed appreciation in value of the property

•    How much hassle will be involved? If your financial analysis looks rosy, it can be very tempting to want move forward with your multi-family purchase at full speed. However, it’s important to not overlook the “hassle factor” of managing a multi-family property and the tenants that come with it. As both a home owner and landlord, you will be responsible for things like repairs, tenant disputes, and potential eviction proceedings.

Making your decision

Whether you are considering buying a multi-family property to make your own mortgage payments more affordable, or looking to use a multi-family home as part of your investment strategy, the basic rules are the same. It’s crucial to balance your emotional considerations with your financial ones, and to do your homework when it comes to analyzing the potential return on your investment. Crunch those numbers, and ensure you’re comfortable with both your financial projections and the role of landlord that you’ll be assuming.

If you think that purchasing a multi-family home in Massachusetts or Rhode Island might be the right move for you, BankFive is here to assist you in any way we can. Schedule a consultation with one of our mortgage experts today, or begin the mortgage application process online.