Consider A Multi-family as a first home?
Did you ever consider a multi-family as a first home? I cut my teeth in real estate as a property manager for large apartment complexes. Wow. This was an eye opening experience. One of the requirements was to live on the property. So when something went wrong everyone knew where I lived and… there were no garages so they also knew if I was home. Yikes. One of the properties I managed had finished basements and flat roofs – both of which can be a problem in St Louis weather. Oh, and I forgot to mention, the apartments/townhouses were built on a natural spring.
Buying multi-families can equal free rent but there is a price to pay. There will be some inconveniences and not everybody has the stamina for being a landlord. The word “no” has to be in your vocabulary. But boy oh boy can it payoff.
Here are some tips for making it a good investment for quality of life and money in your pocket.
Financing Options for multi-family units
The first step in considering a multi-family home is to consult a knowledgeable lender. Most lenders have loan products for up to a 4 family unit. Anything above this requires a commercial loan – a little more difficult. One of the things you will need to know from the lender is the amount of rental income they will credit towards qualifying you for the mortgage. Generally they will consider 75% of the rental income to be a part of your income.
Vinh Tran has several loan products he can discuss with you. He can also talk to you about the options available if you are thinking bigger than a 4 family investment.
Income and Expense
Consult with your real estate agent about the additional costs involved. Compare the real estate taxes of a multi-family unit with those of a single family home in the same neighborhood. Look at the income and expense statement of the current owner for some guidance here also. Compare sewer and water bills. Are you supplying a washer and dryer. Is there a lot of common space that is on a separate electric or gas meter. What is the vacancy rate for the neighborhood. Have you driven around the area and noticed a lot of “for rent” signs.
Location
Your next step is to determine the location. Many renters these days are vastly concerned about walkability. Is it close to restaurants and grocery stores. Is it walkable to entertainment, parks, movie theaters. Is the unit close to public transportation.
From an investment standpoint, locacions near large employers like hospitals, universities and large corporations are more likely to attract potential renters. Is the building in an area that attracts families. If so what are the number of bedrooms and baths that are in demand for the area. If it’s students, they like to share expenses with other students making 3 bedroom units a popular commodity. Knowing the demographics of the neighborhood will be important when you have your first vacancy.
Next, think of yourselves. If you are a couple, make sure you are both on the same page as to your quality of life and expectations. Do you want to live in an area of students and live that close to them. Would you prefer a neighborhood of young professionals. Are you thinking of starting a family in this first home and prefer a neighborhood and a building that is kid friendly. By thinking these things through before you make your purchase you will save a lot of anxiety.
Checklist of considerations prior to signing on the dotted line
- Know your own space and style of apartment that would meet your needs and wishes. Do you want a townhouse, a private back yard for yourself? What about size and number of bathrooms. If you are going to live in it, these are important questions to ask before you buy.
- Know what types of units are popular in the area you are considering buying. If you are considering an area where the renters are mostly retired, I am sure a townhouse would not rent as easily as a unit with a few or no steps.
- The size of the unit matters. There are areas where the demographics are such that a 1 bedroom unit will draw more rent than a 2. If you are buying close to a high tech area (CWE and Midtown) the space that attracts the highest rent may be something that accommodates an office.
- Know your budget ahead of time. What would you budget for a single family home if that were your choice. How much reserve (that extra money you have in savings in case 2 of the air conditioners go out the first month you are there) makes you comfortable. The less strain you put on your budget the easier this type of purchase will be. How long can you afford to have a vacant unit? Be prepared for this, especially in the first year.
- Consult a tax attorney to learn the tax advantages of investment property
In Conclusion
One of my sisters has owned and lived in a 4 family building for over 15 years. The units are small (1 bedroom) which is what she wants because it suits her lifestyle. Her initial intention was to live there for a few years and then move to a single family home in the neighborhood. But now, well, she likes the community feel of this type of living and really sees no reason to give it up – plus she is living rent free.
She keeps the units and the building painted, updated and clean clean clean. She gets above market rate for her units. She attracts renters who want a clean and quiet environment and the tenants work towards keeping the building such. She includes all of the appliances and furnishes a free washer and dryer for the use of the building. She allows no smoking and until most recently no pets.
(Recently she started allowing small pets but charges a very large pet deposit and emphasizes that she will tolerate no pet odors in the building and requires that the lawn is kept clean of “pet deposits”.)
She has fixed up outdoor spaces for the tenants and encourages community gatherings for the building. She has long term and happy tenants and… she is living rent free.
Why buy a multi-family: Hud Clips, Multifamily fund
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