Of all of the different property types, multi family homes are perhaps the most misunderstood. In order to invest in a property that is often misrepresented and overlooked, you must understand the true opportunity. Here are the basics about the multi family home and some of the questions that you may ask yourself before investing in one.
What is a multi-family home?
A multi family home is a domicile with many separate housing units for separate families; however, the units are all in one building. Multi-family homes are often shortened with the acronym MDU, and they resemble apartment buildings in many ways.
What are the advantages of the MDU?
With many units, you have multiple rental incomes coming to you from a single building. Your maintenance and repair costs do not multiply along with your residential units, because much of the internal structure of the MDU is shared. You can save on the upkeep while exponentially multiplying your income if you can keep all of your units rented.
Many MDUs serve as a primary residence for the home owner while the renters actually pay the mortgage on the building. This is very possible to do in well-placed locations with plenty of competition for rental units. If you have the wherewithal and the financial acumen to buy an MDUÂ with access to a main thoroughfare or close enough to public transportation to create a convenience for your tenants, you may be able to build wealth this way.
MDUs are usually located in very advantageous areas. Although you may not be able to rent units out if you want to live in a rural area, urban and metropolitan downtown areas usually have plenty of properties to choose from.
What are the disadvantages of the MDU?
The tax accounting on the MDU can become quite complex very quickly. There are many rules from the Internal Revenue Service that apply specifically to the MDU. The government loves to keep tabs on people who are making money from their homes, so expect extra scrutiny from them.
You are limited in your location options if you want to be in less densely populated areas. Some people like sparse areas, and some do not. You gain this leverage back if you are not actually living in one of the units, but this means that you lose a great deal of self-management leverage. You may even have to hire a building manager to deal with problems on your behalf at an extra expense.
If you live in the building, then your tenants’ problems become your problems. Although this can motivate you to fix problems with your building more quickly, it can also become annoying very quickly if the problem is your tenants. Living in your building can also lead tenants to believe that you are accessible 24 hours a day, which can wear some people thin.
Financing on an MDU is trickier than other types of properties. Aside from the personal finances that you will have to give to your banker for a proper vetting, you will also have to present that lender with a rental income estimate.
You need to make sure that the layout of your building qualifies as a legitimate MDU. Granny flats, or houses with large, single family areas that simply serve as a second unit because of the square footage, are not legally allowed. Even if there is a partitioning wall between rooms that could legitimately serve as a residence for two separate households, it faces additional legal scrutiny to qualify as an MDU.
Finally, you will have to take on the additional responsibility of finding and keeping tenants. This can be difficult if you are trying to do other things in your life. Most people who own an MCUÂ quickly find that it takes up as much time as a full time job. If you do not have this time, then you may need to rethink your investment options.
Should I invest in an MDU?
Not everything about real estate is financial, and most people try to measure the worth of an investment by the entry cost. You may very well be able to afford the down payment on an MDU along with the monthly mortgage. You may even be able to buy the property all cash. However, the investment after the initial payout is what you must truly consider, and the MDU is one of the property types that takes up time and resources.
An MDU should be located in a great area, and you should have some idea of how to keep tenants that you trust in your building. You should have money available for a property manager if you are truly serious about the idea, even if you do not end up using the property manager. You should also have cash reserves on hand in case you cannot keep all of your units full at all times.
Although Warren Buffett said that he would buy “a couple hundred thousand” MDU properties, you should vet the investment for yourself before committing fully. Keep the above tips in mind so that you can make a fully informed decision about your real estate investment future.
2 Point Highlight
Aside from the personal finances that you will have to give to your banker for a proper vetting, you will also have to present that lender with a rental income estimate.
Although no less an investor than Warren Buffett said that he would buy “a couple hundred thousand” MDU properties, you should vet the investment for yourself before committing fully.
