If you’re an aspiring real estate investor, you may have heard the term “multifamily home” before. We’re here to provide a breakdown of property types, loan types and important factors to consider before you make a purchase.
If you’re thinking of adding to your real estate portfolio, Newrez has loans to fit your needs. Reach out to one of our mortgage experts today and we’ll be glad to fill you in.
Understanding Multifamily Housing
A multifamily home is a single residential structure that houses more than one separate living unit, each with their own kitchen, bathroom, living area and entrance. This allows multiple households to live independently within the same building.
Types of Multifamily Homes
- Duplexes (and Triplexes/Fourplexes): These properties contain two separate living units within one building, arranged either side‑by‑side or stacked vertically. Triplexes and fourplexes follow the same idea with three or four units. They’re often a popular entry point for first‑time real estate investors.
- Townhouses: Multi‑level homes that share one or more walls with neighboring units but have their own private entrance. From the street, they often resemble single‑family homes.
- Apartments: Larger multifamily buildings that can range from just a handful of units to hundreds. They’re typically owned by a single entity and may offer shared amenities such as pools, gyms or community spaces.
- Condominiums: Similar in layout to apartments, but each unit is individually owned. Condo owners also share ownership of common areas and amenities with the rest of the community.
In this article, we’ll be focusing on the potential purchase of a duplex/triplex/fourplex or townhome.
Multifamily Homes vs Single-Family Homes
Multifamily homes differ from single-family homes in their function, and they may also require a different financial strategy for investors.
Single-family homes are designed for one household and may appreciate in value based on neighborhood trends and market demand. By contrast, multifamily homes are often valued based on income generation, operating expenses and occupancy rates, and they could also benefit from appreciation.
Distinctions include:
- Multiple income streams instead of one
- Shared infrastructure and maintenance
- Greater complexity in management (and potentially financing) due to multiple tenant households
- Potential for stronger cash flow
Potential Benefits of Buying a Multifamily Home
Your financial strategy is up to you—but here are some possible advantages to evaluate.
Rental Income Diversification
Vacancy in one unit doesn’t eliminate all income, making multifamily properties potentially more resilient than single-family rentals.
Owner-Occupant Advantages
Living in one unit while renting the other(s) could allow buyers to offset their own housing costs, build equity and gain landlord experience with less financial exposure.
Operating Costs
Maintenance, utilities and other expenses could be more cost efficient per unit since multifamily properties share systems, unlike managing several separate single-family rentals.
Potential Drawbacks of Purchasing a Multifamily Home
On the other side of the scale, buying a multifamily property presents some potential challenges. Consider these carefully before making a move.
Possibly Higher Initial Capital Requirements
Multifamily properties tend to garner higher purchase prices than single-family properties. Buyers may have to pay higher down payment, closing costs, reserves and repairs.
Elevated Tax and Insurance Costs
In some instances, multifamily homes may receive higher property tax assessments and insurance premiums than single-family homes. This should be weighed carefully when estimating long-term profitability and establishing rent rates.
Ongoing Management Demands
Running a multifamily housing property can be very hands-on. Duties include (but are not limited to) screening tenants, collecting rents, compliance and maintenance. A professional property manager may help with the daily load, so you may want to evaluate if their services are worth the money.
Financing Options for Multifamily Homes
Newrez SmartVest
SmartVest was created with real estate investors in mind, as it allows borrowers to qualify based on property cash flow (rental income) rather than more traditional income streams. Learn more about SmartVest.
Conventional Loans
Conventional financing is available for multifamily homes up to four units. Reach out to us to learn more about Newrez’s conventional loan options.
FHA Loans
Properties with up to four units are also eligible for these government-backed loans. FHA loans enable borrowers to put as little as 3.5% down, so long as they live in one unit as their primary residence. Learn more about FHA loans.
VA Loans
Similar to FHA loans, these government-backed loans allow for the purchase of properties with up to four units so long as it’s owner-occupied. These loans allow for zero down payment with full entitlement. Learn more about VA loans.
Building Your Strategy
Before making any major decisions, be sure to research market demand and take a close look at your finances. When you’re ready to discuss loan options, reach out to Newrez and our experts will be glad to break down the details for you.
