Disclaimer: The author has no affiliation with any of the products, services or companies discussed in this article.
Travis Cadman and Investar USA are residential builders. They have constructed and sold 2000 residential units to this day. One of their specialties is the multifamily home. A multifamily home is a building with more than one unit where people can live. They have their own living rooms, kitchens, electric bills, and so forth.
It is also known as a multifamily dwelling unit, or MDU. They are usually found in densely populated areas like in cities where space is at a premium. Multifamily homes can be owned, rented or serve as an investment property and landlords can collect rent from tenants.
There are approximately 4 million multifamily dwellings nationwide. Although living too close with each other may not be ideal in terms of privacy or noise, people in multifamily homes pay less than those in single-family homes. Because of this, they are taxed with less home maintenance, because there’s a management company who is responsible for repairing the building’s exterior or mowing the lawn.
Here are the common types of Multifamily properties:
● Duplex: Two houses in a freestanding structure
● Townhouse: Any number of houses connected at the sides with separate entrances
● Apartment building: It could be hundreds of homes in a structure. Unlike the other types of dwelling, apartments are often rented by tenants rather than owned.
Today, its a smart financial strategy to buy a multifamily home to rent out (or where you live in one unit and rent out the other units). Here’s why: Homeownership is decreasing. “This is a great time to think about buying investment properties, because people are looking for houses to live in.,” says Daren Blomquist.
Unlike house flippers, who are investing time and take a lot of risk, investors in multifamily housing have to anticipate to own the property and be a landlord for decades, says Blomquist. It is a long term process because if you take care of the building for twenty years, it will take care of you.
The trick here is to expect the unexpected: You might encounter renters who are not easy to deal with and then there’s issues with damage. Consider the following factors before investing.
● Capitalization rate: This is a formula that indicates the potential return of an investment. CYou can calculate the cap rate by dividing the net operating income by the price of the property. Blomquist considers a rental property acceptable if it has a cap rate of 6% or more.
● Expenses: Some multifamily property expenses are fixed. For example mortgage, taxes, and insurance maintenance. However, these are unpredictable. Usually, new properties, with appliances and furnaces require maintenance. However, properties 20 years old or usually needs foundation repairs, new roofs, and upgraded heating, ventilation, and air conditioning equipment. These unexpected maintenance bills can affect the profit of investment properties.
● Turnover: A tenant leaves and another tenant moves in the next day happens rarely. Blomquist says it usually takes two months. That means two months without income with higher-than-usual expenses for maintenance.