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Benefits of Buying a Multifamily Home

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Not every homebuyer desires to own a traditional, single-family property. Aside from condos, co-ops or townhomes, another property type that buyers — including first-timers — may want to consider purchasing is a multifamily home.

Owning a multifamily property provides the potential to create multiple income streams and affordable housing for renters, among other advantages.

Keep reading for a deeper understanding of multifamily homes and their benefits.

Understanding multifamily homes

A multifamily home is essentially the opposite of a single-family home. These types of properties house multiple families and have two or more separate units under a single structure. A multifamily home can also be referred to as a multiple dwelling unit.

There are residential multifamily properties, which have four units maximum, and nonresidential multifamily properties, which have at least five units or more. We’ll keep our focus on the residential side here.

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6 benefits of buying a multifamily home

Choosing to take the multifamily route rather than choosing a single-family property sets you up to potentially reap several benefits. There’s still work to do on your part for many of those benefits to come to fruition, however.

Below we highlight six advantages of buying a multifamily property.

Higher loan limits

Multifamily homes can qualify for both conventional financing as well as loans backed by government entities, such as the Federal Housing Administration (FHA).

Mortgage loan limits for multifamily homes are higher than those for single-family properties. For FHA loans, the 2019 limits for multi-unit properties are:

  • Two-unit properties: $403,125
  • Three-unit properties: $487,250
  • Four-unit properties: $605,525

For comparison, a single-unit property has a loan limit of  $314,827.

It’s possible to qualify for an FHA loan with as little as 3.5% down, a credit score of at least 580 and a 43% debt-to-income (DTI) ratio.

The limits are higher for conforming loans that adhere to Fannie Mae and Freddie Mac guidelines:

  • Two-unit properties: $620,200
  • Three-unit properties: $749,650
  • Four-unit properties: $931,600

Conforming loans for a single unit have a limit of $484,350 in most of the U.S.

Borrower requirements for conforming loans typically include a 620 minimum credit score, 3% down payment and a maximum 45% DTI ratio.

More units to work with

Owning a home with multiple units means you have more space available for whatever endeavors you might be interested in pursuing. Perhaps you want to become an Airbnb host or open a bed-and-breakfast.

“(A multifamily home) may also make sense if you’re trying to provide housing that’s more affordable for family members,” said Marietta Rodriguez, president and CEO of NeighborWorks America, a Washington, D.C.-based community development nonprofit.

The good thing with all of these possibilities is that the extra units mean you don’t have to sacrifice your personal space to implement them as you would with a single-family home.

Be sure you check with your insurance carrier for any changes you’ll likely need to make to your homeowners insurance coverage — possibly adding a business or landlord policy, for example.

Gateway to real estate investing

Owning a multifamily property gives you the opportunity to try your hand at real estate investing. One way you’re able to do so is through a concept called “house hacking.”

House hacking allows you to live in one unit of your property while renting out the other vacant units in your property. You become a landlord and property manager in addition to a homeowner.

Be sure you do your homework before you start welcoming in tenants, however.

“We would really encourage them to go through landlord training because there are local and state laws that they would need to adhere to,” Rodriguez said.

Keep in mind if you eventually plan to move and rent out the unit you previously occupied, you’ll need to have a conventional loan on your property to do so. The FHA expects you to occupy the multifamily property you own.

Streamlined property management

Because your potential rental units are all housed within the same property, you have a little less stress on the property management side of things. You’re not forced to travel to multiple locations to address maintenance requests or other issues that may come up.

You also save yourself some time on the financing side by already having purchased units available for rent within your property. In other cases, you would likely have to try and borrow another mortgage to get a separate property for investment purposes, according to Lawrence Yun, chief economist for the National Association of REALTORS in Washington, D.C.

Extra help with your mortgage

As previously mentioned, a multifamily home gives you the opportunity to rent out your empty units. This can create a steady cash flow and help cover your monthly obligations on the property, plus allow you to pay down your debt faster — saving you time and reducing the amount of interest you’ll pay over the life of the loan.

“Especially for younger people who want to become homeowners, they could have another person essentially pay a partial payment for their mortgage,” Yun said. “It’s a very attractive feature.”

However, be sure you understand the risks of relying on rental income and have reserves at the ready to pay your mortgage just in case something goes wrong with your tenants.

“If the renters don’t pay, you’re still on the hook, so you need to have some cushion in order to do that,” Rodriguez said.

Tax benefits

You may qualify to deduct the interest you pay on the mortgage for your multifamily property. The IRS allows taxpayers to deduct interest on home loans worth up to $750,000, or up to $375,000 if you’re married filing separately. This deduction applies to primary and secondary residences.

Additionally, you may be able to deduct up to $10,000 worth of the state and local property taxes you pay each year, or up to $5,000 if you’re married filing separately.

On the rental side, you may qualify to deduct operating expenses, such as insurance, maintenance and utilities. Check with your tax adviser for more guidance.

 

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