The American dream of homeownership can take many forms. For most of us, it’s the allure of owning and living in a detached single-family house that you can decorate and landscape to suit your personal lifestyle.
For others, owning a multifamily structure–or multidwelling unit (MDU)–is more appealing for a number of reasons:
- You can live in one unit and rent out the others as a source of income.
- You can live elsewhere and rent out all the units for income.
- You can purchase an MDU as an investment and hope to sell it for a profit later.
Whatever your motivation, it’s important to know the different types of multifamily properties for sale should you decide to become an owner. Multifamily dwellings are typically considered commercial real estate, so working with an experienced commercial agent is a great way to get to know what’s available in your area. Also feel free to connect with Ron Sanford, our Commercial Division vice president.
What is multifamily housing?
According to realtor.com, it is a building with more than one unit where people can live, each with their own separate kitchens, living rooms, utility bills, patios, and so on. MDUs are typically found in densely populated areas such as cities where space is at a premium. As mentioned, they can be rented, owner-occupied, or act as an investment property for landlords to collect rent from tenants.
How many MDUs are there?
As of 2016, there were approximately 4 million multifamily dwellings nationwide, compared with about 90 million single-family homes. While living in close quarters with neighbors might not be ideal for privacy or noise, people in multifamily homes generally pay less than those in single-family homes. They also don’t have to deal with a lot of maintenance issues because a property-management company is often responsible for repairing the building’s exterior, landscaping upkeep, pool care, and maintaining other common areas.
Types of multifamily homes
Multifamily homes come in all shapes and sizes. Some of the more common designs include:
- Duplex: Two residences in one freestanding structure.
- Townhouse: Any number of homes attached at the sides with separate entrances.
- Triplex: Similar to a duplex but three residences. More common in some older neighborhoods in certain cities.
- Quadplex: Similar to a triplex but with four units. In some cases, the arrangement of residences may be different and the lot size larger than that of a regular house.
- Semidetached: One building consisting of two separate “houses,” typically side by side, each with separate entrances and often without common inside areas. Each house typically has a separate owner.
- Condominium (condo): A private residence in a building or community with multiple units, governed by a homeowners association.
- Apartment building: Can range up to hundreds of units in a single structure. Unlike the dwellings above, apartment building units are often rented by tenants rather than owned.
Buying a multifamily home to rent to tenants, or where you live in one unit and rent out the others, can be a wise financial strategy, especially in a tight housing-inventory market. Why? Homeownership in many areas has been declining, dipping two years ago below the 66.6 percent historical average. People need a place to live, so an MDU could be a good long-term investment for the owner. If you take care of a rental property for 20 years, it will take care of you for life, a popular real estate saying goes.
Make sure it’s the right move for you
If you do want to invest, be sure you’re ready to deal with the unexpected: inconsiderate renters, repairs, and upkeep are just a few of the issues you’ll probably have to face. Consider these factors before investing.
- Cap rate: The capitalization rate is a formula that indicates the potential return of an investment. Calculate the cap rate by dividing the net operating income (how much you pocket after expenses) by the price of the property. A rental property with a cap rate of more than 6 percent should be acceptable.
- Expenses: Some multifamily property expenses like mortgage, taxes, and insurance are relatively fixed; maintenance, however, is always unpredictable. New properties, with appliances and furnaces still under warranty, usually require little maintenance. But properties more than 20 years old are bound to eventually require new roofs, foundation repairs, and upgraded HVAC equipment. These unexpected maintenance bills can really eat into the profit of investment properties.
- Turnover: It’s not very often that one tenant leaves and another move in the next day. Two months between tenants is more like it, which means two months without income, along with higher-than-usual expenses to repair walls, clean carpets, and possibly paint to make the property more appealing.
- Your personality: Do you have the patience of a saint? Can you focus on the forest rather than the trees? You’ll need those Zen-like qualities, along with some handyman skills, to succeed in multifamily investing. If your personality isn’t suited to being a landlord, you can hire a property manager to make repairs and find tenants. But you’ll be charged a fee, usually about 6 percent of your rental income, which can erode your profits.
Are you ready to find your perfect? Whether you’re looking for a single-family home or investment property, any one of our dedicated real estate professionals is ready to help.
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