An Easy-to-Follow Multifamily Home Buying Guide

Have you thought about buying—and living in—a multifamily home? While it's not easy to find a place to be your investment property and your forever home, it might be the best financial decision.

An image of a family moving into a home.
Photo: Getty Images.

Moving your family from a single-family house (SFH) to a multifamily home (MFH) will constantly remind you just how profitable property appreciation and rental revenue can be.

A multifamily house is classified as such because it more than one living space under the same roof or on the same land. Traditionally, these homes were designed for different generations of the same family to live together on the same property, but to have designated private living spaces for each household. Today, few families still choose to live this way, so that leaves a lot of properties open for rental opportunities.

These properties are so highly sought after because they have ample space for an owner to provide a high standard of living for their own family, while also generating income by providing the same to others.

It is important to know what to look for in buying a multifamily home, because there are major differences across the purchase types and terms. In the United States, a residential MFH is between two and four units, and a bank will provide a conventional loan to fund it. Anything over five units will require a commercial loan, which requires a different qualification process.

Here are the four most important things to keep in mind in order to purchase the right multifamily house for your family and financial goals.

Shop around for different types of MFHs.

Real estate spans a few different categories: residential, commercial, and industrial. Although an MFH is considered residential if it is under four units, anything over five is considered commercial. That said, a two- to four-unit home doesn't have to fit the mold of a traditional house with separate apartments. There are some that are attached, like a three or four-family home; others may look like an apartment over the garage or a rented pool house.

There are also mixed-use properties, which may have a storefront on the ground level and an apartment or two on top or in back. MFHs are quite diverse, but often, each style of MFH is located in a different zoning area—some are more suburban, others more urban.

To make matters more complicated, it's also important to be sure that rentals are well-located near commercial real estate—supermarkets, jobs, nightlife, as well as schools and other conveniences. Of course, finding a home in good condition and in a great location can take time.

Not only should you set all your search engines to "multifamily," but you should also reach out to an agent. An agent will go the extra mile to look for SFHs that have the potential to be converted into a multi. They'll consider homes for sale that have lots of acreage, an in-law suite, an annex or pool house, or a finished basement. In many towns, these places can become an MFH, even if they're not one today.

Visit properties in person.

If you find a home online or just passing by, you'll want to check for open houses to visit. Otherwise, contact a real estate agent—your own or the listing agent—to schedule time to walk through the home. Although it is unconventional for an SFH seller to be on hand for this, MFH sellers may be on site, and that may be useful.

Sure, the previous owner was a resident, but you should think of them as the previous owner of the business you hope to buy. Many MFH sellers are open to a conversation with potential buyers about rental vacancy, trusted contractors, and the lifespan of some of the major systems—from roofing to HVAC to plumbing.

In today's era of virtual staging—in which photos are made to look like the home has furniture and features that are not actually in the space—aspiring MFH buyers must set eyes on the property they want to buy. This means not assuming that every unit looks exactly the same or has the same finishes.

A visit will help you and your family understand some major elements of the home that will affect the rent—room size, condition of appliances, storage/parking spaces, access to separate entrances, and noise levels from the outside or the other units. These are details that are best answered by an in-person visit. Armed with this information, you can think critically about how much you can charge for rent and the real costs of overhead.

Analyze cash flow.

First-time MFH buyers may find themselves slowly turning into accountants. Doing quick math in your head or with a calculator app will help discerning buyers check potential returns on investments, assets, and cash flow, rather than just looking at materials for countertops and floors.

The fact is, cash flow is very important for every real estate investor and MFH owner. Cash flow is all about how much money your family will take home after all the expenses for the home purchase and rental are covered. This includes the mortgage, property taxes, insurance, maintenance, utilities, and repairs.

Estimating the total rent is relatively easy; do it by using Zillow and to look at comparable rental properties in your neighborhood—and also at how long properties have been listed on the market. Assuming that it takes about one month to find a renter, you can roughly estimate how much rental income you'd make a year.

Calculating estimated expenses, on the other hand, can be more difficult. Subtract from that total the cost of the mortgage, property taxes, insurance, maintenance, utilities, and repairs. Plan for other expenses, too: landscaping, property management (if you have it), business expenses such as tax preparation and bookkeeping. Whatever is left over would be your cash flow.

Sometimes cash flow is negative because the required expenses surpass the rental income. In those cases, think realistically about how long it will take to become cash-flow-positive—or at least to break even. This may mean increasing the rent, using lower-cost service providers, or finding other ways to supplement with paid parking, paid storage, or DIY upgrades.

There are lots of real estate rules of thumb to consider, but only you know your financial goals. Search for properties that reach targeted results and exclude those that might be nice to live in but produce no cash flow.

Finance the purchase.

Before making an offer, you'll need to make sure you can afford the house; this is why cash flow is so important. In the United States, buying an investment property typically requires a 20-25% down payment on a bank loan if you're buying a MFH that you and/or your family do not plan to live in. If you do plan to live in the home, however, you may be able to put down as little as 5% with some lenders, based on credit worthiness.

Talk with a conventional lender about your options for an investor vs. FHA loan, based on your finances and goals. If you have your eye set on a property that has over five units, then you'll need to find a bank that offers commercial loans. Ask what those terms include. To qualify for these loans, the lender is less focused on your own salaried income, and more concerned about how much income this property can generate.

Last, MFHs are ripe for creative or non-conforming financing. This could come in a variety of forms. A buyer might pool money from friends, family, and investors to purchase a property in cash. Rather than having a loan with the bank, the buyer would have personal loans or investment terms with each funder.

Also, the seller may be willing to help finance the purchase. All of these arrangements are built on relationships—and trust between parties could make these kinds of payment plans lucrative for a variety of individuals, instead of a big bank.

The bottom line of buying a MFH:

Finding the perfect multifamily home takes time and effort. There's a significant amount of research needed about the home, the neighborhood, renter quality, and finances. MFH seekers should start well in advance and be patient along the way. This market is much more competitive than the SFH market, and a lot more things can go wrong in the buying process.

To best protect yourself and your family, work closely with real estate agents and professionals who know the pitfalls—and don't be afraid to build a relationship with the seller. After all, they have had good memories in this home and may still be personally invested in making it a successful rental business for generations to come.

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