Duplex or Multifamily Home as Your Real Estate Investment?
Author: Andy (Anh Dung) Pham
If you are thinking of investing in real estate, there are several ways to accomplish that and gain another stream of income over time. In this article, we’ll discuss the Pros and Cons of buying and renting out multifamily housing. This strategy has excellent potential depending on your time, assets and investment goals. Let’s get started with the basics of property ownership and becoming a landlord.
You will encounter several options in multifamily properties. A duplex is a residential building divided into two units, each with separate entrances and living quarters. A triplex is divided into three units, and a quadruplex includes four units.
Generally, if there are more than four units, it will be considered an apartment building. Regardless of the number of homes available for occupancy, as owner, you can decide to either live in one of the units and rent out the rest or rent out all units and manage the property as an absentee owner.
You’ll find that the advantages of owning a multifamily dwelling are attractive, and as with other investments, there is a learning curve—often by trial and error. Doing the research and talking with other investors, property owner and landlords will help you sharpen your skills and make informed decisions. Choosing a property in a nice neighborhood will attract renters who will respect the property and pay on time.
If greater cash flow is your objective, you can live in one unit and use income from the other(s) to help pay the mortgage. If the units do not have laundry facilities, you can set up coin-operated washers and dryers to help cover some of the utilities.
Some buildings will have separate utility bills for each unit which is an easy way for everyone to be responsible for their own usage. Other properties have utilities billed together and costs can be included in the rent or charged back which can be a stickier situation.
When you own a building of multiple tenants, it makes it easier on you as owner with everything at the same location. It’s more convenient to make only one stop to check on maintenance items or collect the rent than to drive to several locations checking on multiple properties.
If you’re not planning on living there, make it even more convenient on yourself by purchasing a property that is close to home and/or work. Making a stop along the way is much easier and less time consuming than fighting traffic to go out of your way.
Be sure to talk with your CPA about possible tax deductions and incentives and how the property ownership will impact your financial situation and long-term goals. A professional will understand how the property will affect your cash flow, taxes and financial security and will help you choose the best option for your financial reality. You can also discuss how to set strategies for beneficial appreciation on your investment.
Realistic projections on maintenance and improvements are also a must, and you can talk with your CPA, property manager if you choose to use one, and other investors to set achievable goals for the property. You’ll want to check on reasonable rental rates for the area and type of rental you are providing.
As you improve curb appeal, make updates and repairs, you’ll attract tenants who are willing to pay more for the upgraded, comfortable housing. It’s possible that the improvements you make will add more value to the property than an equivalent in a single-family home.
Learning about becoming a successful landlord will help you understand how to choose a good tenant and ways to best manage your property. When you succeed at keeping good tenants, you will have a steady income and avoid the vacancy/no income months.
Turnover causes you more work because of the added time and expense of cleaning, repairing and preparing for a new tenant which you need to find. Always keep the resale in mind, however far distant that is, because a well-maintained, profitable property will find another investor willing and ready to buy it when you move on.
As a rental property owner, you have a lot at stake. Carrying adequate insurance for rental properties is what ties it all together.
Owning rental property also brings with it some disadvantages or at least some additional homework on your part. There are rules and regulations that protect tenants and you need to be aware of them so that your business relationship with your renters is compliant. Each municipality has different rules, so be sure to stay informed.
When looking for a multifamily property, a conversation with your mortgage professional will help you understand if you are ready to invest and how to determine if your mortgage will be covered by the rent received.
You’ll want to have a financial cushion for the months that the unit(s) may be vacant and for those times of high maintenance costs for appliance replacement or mechanical failure. You can expect a 20% down payment, especially if you’re not planning to live on the property.
Managing tenants can be a breeze or a nightmare. Do some research and reading on handling this part of the bargain. You can also talk with other investors and property managers for tips on how they handle rental issues like nonpayment of rent, damage to the property or conflicts with neighbors. If you really dislike this part of the opportunity, you can hire a property manager to handle tenants and/or property maintenance.
Yes, the maintenance that accompanies multifamily housing ownership is obviously a multiple of what you would encounter in a single-family home. You have multiple appliances, mechanical, plumbing and electrical issues as well as all the interior and exterior components that need care and eventual replacement. You need to anticipate projects (as much as you can) so you can budget for them over a period of a few years rather than having all expenses hit at once.
Once you’ve taken a serious look at the reality of rental ownership, you might be excited to get started or decide to take another path. If you’re still thinking that it’s a workable plan, here are 9 rules to live by.
In general, the costs to manage multifamily housing will be substantially more than operating a single-family home. The purchase price, down payment and mortgage will be higher, and you’ll need a financial cushion to get you through the months when things go wrong. When things run smoothly, you’ll enjoy the rent that is coming in and helping you save, cover mortgage costs or finance the next repair project.
Multifamily units can indeed be a good investment and, once you’ve done your homework, should be less of the unexpected stressful time and more pre-planned projects. If a tenant calls for assistance, be sure to answer promptly.
You never know what the problem really is until you see it. If you’re ready financially and will enjoy putting in the time and energy, look for a good location and price and then good tenants. If you’re not excited about the related work and response time, ask for referrals to an experienced property manager who can help.
Finding experienced real estate professionals to help you every step of the way will serve you well. Their wisdom and experience can save you thousands of dollars and many headaches. You can find help on preparing a workable budget, managing the property and becoming a good landlord. If you’ve enjoyed this article, please share it with a friend who might also find it interesting. Happy investing!