Many individuals are attracted to multi-family homes due to their tax benefits and the ability to generate income.
However, before deciding to invest in or buy this type of house, you must understand your responsibilities as a landlord, the expenses involved in maintaining the building, and more.
This guide provides an overview of the multi-family housing world.
We begin by defining a multi-family home and the various available types.
Then, we explore the reasons to invest or not in this type of housing and conclude with tips to consider when searching for the right multi-family property.
What is a Multi-Family House?
A multi-family house, also known as a multi-unit dwelling, is a type of residential building designed to house multiple families in separate living units within the same building.
Multi-family homes can range in size and style from small duplexes or triplexes to large apartment buildings.
Each family or household in a multi-family house typically has its own private living space, usually including a kitchen, bathroom, living room, and one or more bedrooms.
Sometimes, shared spaces like hallways, laundry facilities, or outdoor areas may be shared.
Multi-family homes are famous for families who want to live close to each other or for property owners who wish to generate rental income.
They can also provide affordable housing options for tenants who cannot afford a single-family home or apartment.
Types of Multi-Family Houses
A Duplex House consists of two units that are attached. Each unit offers its separate entrance, living space, and outdoor area.
This type of housing is also referred to as a twin home or two-family house. Typically, a duplex is owned by a single individual, family, or corporation.
The owner can reside in one unit and rent out the other to earn rental income, in which case the duplex is considered an owner-occupied rental for mortgage purposes.
Alternatively, the owner can rent out both units; this type is considered an entire rental property for mortgage purposes.
A Triplex House or a three-family house comprises three attached units, each with its exterior wall, living space, and outdoor area.
Like a duplex, a triplex can be owned by an individual, family, or corporation.
The owner may choose to reside in one unit while renting out the other two, in which case the property is considered an owner-occupied rental for mortgage purposes and the rental income is used to qualify for the mortgage.
Alternatively, the owner may rent out all three units, making the property a rental property.
The income generated from all units will be used to support the mortgage qualification ratios.
A Townhouse is a form of attached housing that offers the best of both worlds – the independence of a single-family home and the convenience of condominium living.
It typically features a shared entrance leading to individual units.
The outdoor area, such as the yard, is owned and maintained collectively by the unit owners.
Townhouses often have a traditional appearance and layout, with multiple levels of living space, and can vary in size from small, compact units to larger, more spacious homes.
They are ideal for families, young professionals, and downsizing retirees who desire a low-maintenance lifestyle but still want the privacy and space of a single-family home.
Compared to traditional single-family homes, townhouses are more affordable and often located in urban areas with access to public transportation, shopping, dining, and other amenities.
They also typically have a lower cost of living, including lower property taxes and maintenance fees.
A townhouse is an attractive option for those seeking a sense of community, convenience, and a low-maintenance lifestyle in a relatively affordable, central location.
A fourplex is a multi-residential dwelling with four separate units within a single building. Each unit has its entrance and living space, offering privacy and independence to its occupants.
The fourplex structure is similar to a townhouse, with a common entrance leading to the individual units.
It’s usually owned by one person or entity renting out the units to generate income.
This property type can be owner-occupied with rental income, meaning the owner resides in one unit while renting out the other three. Alternatively, it can be fully rented, with the owner residing elsewhere.
Regarding mortgage considerations, if the fourplex is owner-occupied with rental income, it’s considered owner-occupied property with rental income.
On the other hand, if the owner rents out all four units, it’s treated as a fully rented rental property.
Condominiums are a unique form of housing where each unit is privately owned.
Still, the common areas of the building, such as hallways, elevators, and stairways, are jointly owned by all the unit owners.
A condominium can range from a single unit in a high-rise building to a cluster of units in a townhouse-style complex.
A condominium’s ownership structure means that the common areas’ maintenance and upkeep are shared between the unit owners and managed by a condominium association.
Living in a condominium offers the convenience and amenities of apartment-style living but with the added benefit of individual ownership.
Before purchasing a condominium, it’s essential to consider the fees associated with being a part of the condominium association and the rules and regulations of living in a shared community.
Apartments are a popular housing option for people who want a convenient, low-maintenance place to live.
They’re often smaller than other housing units, making them a good choice for single people, couples, or small families.
When you rent an apartment, you’ll typically pay a monthly rent that includes some of the utilities you need to live there, such as electricity, heat, and hot water.
This can be a big plus because you don’t have to worry about setting up and paying for these services separately.
Apartments are usually found in larger buildings with several units, known as multiplexes.
You’ll have neighbours nearby, which can be great for socializing.
On the other hand, you’ll have to be mindful of noise levels and respect your neighbours’ privacy.
Overall, apartments are popular and convenient for many who want a simple, easy-to-manage living situation.
Why Buy a Multi-Family House?
- Cost-effective Living – Buying a unit in a multi-family home like a condo or townhouse can be more cost-effective than renting. It is affordable for families and individuals who desire a comfortable living space but can’t afford a standalone home.
- Tax Benefits for Developers – The government provides tax incentives to support the development of multi-family homes in urban areas, providing financial benefits for the buyer.
- Low Maintenance Lifestyle – The multi-family home offers low maintenance, making it an ideal choice for people seeking a hassle-free living experience. You don’t have to spend time and money on upkeep as the unit is built to handle maintenance for you.
Why Note Buy a Multi-Family House?
- Unauthorized Additions – Avoid multi-family homes with unauthorized units added by the current owner, as the City might not have approved it. Obtaining a mortgage for such properties can also be challenging.
- Responsibility as a Landlord – If you’re planning to rent out units, be prepared for the responsibilities of a landlord, such as providing necessary repairs, ensuring utility services, and maintaining common areas.
- Legalities – Before purchasing, check with local authorities that the multi-family home you’re considering is legal and meets all the requirements.
Mortgage for Multi-Family Home: What to Know
Securing a mortgage for a multi-family property can be complex, as these homes can be considered either residential (with four or fewer units) or commercial (more than four units).
If you plan to live in one unit of a multi-family property, it’s considered an owner-occupied rental. This qualifies you for benefits such as a lower down payment of 5% to 10% and a mortgage rate similar to a single-unit detached home.
Take advantage of these perks to make your investment more affordable.
Plus, the rental income from the other units will be used to support the qualification ratios, potentially reducing your income requirements.
However, if you don’t plan to occupy any units in the property, it will be treated as a pure rental or investment property.
In this case, you’ll need a minimum down payment of 20% of the property’s value. The rules for rental property mortgages will apply.
Key Considerations when Buying a Multi-Family Home
When buying a multi-family house, you need to consider the following factors.
Location Considerations for Multi-Family Homes
The location of your multi-unit home is crucial as it impacts its market value and rental potential.
When purchasing a multi-family property for rental purposes, choosing a location with strong rental demand is important to maximize your returns.
Assessing the Condition of a Multi-Family Home
Assessing the property’s current and potential future condition is also essential.
Ensure to thoroughly check all the home’s features to ensure they function properly.
Consider getting an inspection, as multi-family homes are often built with shared walls and partitions, and problems with one unit can affect others.
Owning and Maintaining: Multi-Family Home Costs
It’s also important to know the current maintenance fees associated with the property – property taxes, electricity, heating, and yard maintenance.
These fees will become your responsibility once you take ownership.
To better understand these expenses, consider requesting copies of the previous owner’s maintenance agreements to see the standard cost of running the property without the mortgage expenses.
Pre-Purchase Budget Check for Multi-Family Homes
Before you start looking for your multi-family home, assessing your financial ability to buy one is a good idea.
If you’re interested in a property with four or fewer units, you can use approvU for a quick evaluation and pre-approval.
Simply provide approvU with basic information about your credit and finances.
Its algorithm will then compare your details to the qualification criteria of over 25 mortgage lenders.
If you’re likely to be approved for a mortgage, approvU will generate a pre-approval letter for you to use during home-buying.
Once you’ve found your dream property, getting a mortgage is easy with approvU.
Update the details about the property to generate a list of mortgage options for you to choose from and apply for.
Special Perks of Multi-Family Homes: What to Know
When buying a multi-family home, it’s essential to understand the unique features that come with it.
This can help ensure you get exactly what you want before committing to the transaction.
When buying a townhouse or fourplex, ensure the purchase agreement includes essential features like appliances, laundry facilities, a garage, and storage space.
This ensures that your new home is fully equipped and meets your needs.
You can ask the seller for a comprehensive list of everything that comes with the home.
This way, you can be sure that you’re making an informed decision about your investment and getting the most value for your money.
Is it a Legal Multi-Family House
Verifying that the multi-family home you’re interested in buying is a legal dwelling is essential.
Converting a single-family house into a multi-family property through unauthorized modifications can create dangerous issues like inadequate electrical and water supply.
It’s important to ensure that any conversion is done legally and up to code to avoid such problems.
Before finalizing the purchase, you should check with the City to confirm that all the units on the property are legally approved and meet the necessary safety and building codes.
This step will ensure you’re not taking on any potential risks or liabilities associated with an illegal dwelling.
When considering investing in a multi-family home, there are several key factors to take into account to ensure that the property is a sound investment:
- It is crucial to assess the property’s condition, including the features and appliances, and to have it inspected by a professional.
- The property’s location is critical as it affects the marketability and value of the property, so it is vital to choose a location with an active rental market.
- Knowing the costs associated with ownership, including maintenance fees, property taxes, and utilities, is essential.
- It is important to ensure that the City legally approves the multi-family home to avoid potential safety hazards or legal issues.
Considering these factors, multi-family homes can be an excellent investment opportunity for those looking to benefit from real estate.