A Multifamily House
If you are starting out buying a property for the first
time, you may want to look into multifamily houses. Here is the opinion of the "Independent Financial Portal" on the subject.
What exactly is a multifamily house?
For the purposes of the real estate industry, a multifamily house is a
freestanding building composed of from two to four separate living units, with
each unit having its own bedroom, kitchen, and bathroom facilities. Some are
structured with all of the units on a single ground level, while others may
have one or more units on multiple floors. Still other types of multiplexes,
as they're sometimes called, are made up of multi-floor units built
side-by-side under one roof. These are commonly known as townhouses.
Many real estate investors, especially
those new to the marketplace, prefer multifamily properties as their
investments of choice. Let's examine some of the more common reasons for this
popularity.
Multifamily houses provide a relatively
easy entry into the real estate marketplace. If you don't yet own any real estate,
you don't have very much cash at your disposal, or you want to combine your
first home-buying experience with your first investment property, a multifamily
house may well be the solution to your needs.
While not only providing physical
shelter as your home, this type of investment can also be supported by the
rental income you receive from it. Additionally, there are numerous federal, state, and
community financing programs in existence that can help you purchase an
owner-occupied multi-family house with little or no down payment. Qualification
guidelines for these mortgages are generally less
stringent than for any other type of investment real estate, and the rent from
the unit or units that you don't occupy can be considered as part of your
qualifying income.
Multifamily houses provide an opportunity
for the investor to employ "sweat equity" to build real estate
wealth. The maintenance demands of a multifamily property are not very
different from those of a single-family house, and both owners and
owner-occupants often find that they can save substantial amounts of money and
build up sweat equity (increasing their property's value with direct labor) by
doing much of the maintenance and renovation work themselves. Furthermore, the
work can be done over time as cash becomes available and units become vacant
and in need of renovation. This can be very appealing to investors looking for
long-term capital gains. On the other hand, for those investors in search of a
quick turnover more like that of the single-family fix-up property, the cash
received from a multiplex's rented units can ease (or perhaps even eliminate)
the financial burden of carrying the property while renovations to units, the
exterior, or the property grounds are in progress.
Multiplexes can very often provide a
substantial positive cash flow. A well-chosen multifamily property can
be a long-term positive cash-flow investment. Because these properties are
often managed by their owners, operating costs can be significantly reduced.
Vacancy of a unit, however, can cut into the property's cash flow. In an
owner-occupied two-unit house, for example, all property income ceases when the
rental unit is vacant. In an owner-occupied four-unit home with one vacant
unit, the income is reduced by one-third. So, if you're in the market for a
multiplex and you know that you'll be depending upon rents to meet the
property's debt servicing and operating costs, be very careful to choose a
property in an area where rental demand is high and the vacancy rates are low -
even if you have to pay a bit more for the property. The added income security
will likely be well worth the additional expense. What's more, because the
property is in a high-demand area it can generally be expected to appreciate
more than similar properties in marginal locations.
It must be kept in mind; however, that
ownership of multifamily real estate is typically management-intensive. It's a
"hands-on" investment that often calls for the performance of routine
maintenance, such as mowing grass, unplugging sinks and toilets, and replacement
of the odd refrigerator. Especially at the outset, owner-occupants will usually
always do their own managing because during that time the cost of a
professional management firm would likely be too large for the owner's
operating budget. Later, once several multifamily houses are in the investor's
portfolio, a management company will typically be hired.
A multifamily property can be used as
an effective first "building block" in a real estate wealth-building
pyramid. A multifamily home is often the first property acquired by a
beginning real estate investor. The capital needed for such a purchase is often
relatively small and the potential resale market is quite large, including
other investment beginners seeking their first properties. Although multiplexes
generally sell less quickly than single-family houses, property turnover is
usually still faster than that of small apartment buildings or commercial
properties.
For nonowner occupants, a 1031 tax-deferred
exchange can move the entire profit from the property's sale into another,
larger multifamily structure. Using a different strategy, as an owner-occupant,
you can sell your property after two years of living on the premises and
receive the portion of the profit that's equivalent to your living unit
tax-free (in a two-unit home, for example, half of the profit would be
tax-exempt). With careful financing and a good track record of on-time mortgage
payments, you can expand your investment into two multifamily buildings. You
can then continue this pattern at periodic intervals to constantly increase
your net worth.
On the other hand, if you prefer to
hold onto your first owner-occupied multifamily property because you enjoy
living there or because it's a solid source of present and future positive cash
flow, you might consider another alternative. Once refurbishing, renovation and
appreciation have increased your equity, you can refinance the property while
you're still an occupant, thus taking advantage of owner-occupant qualification
guidelines and interest rates. You'll then have down-payment cash for the
purchase of another investment property.
But always be mindful to watch the numbers
closely. When you refinance based upon appreciation and the improvements that
you've made, you'll likely encounter higher mortgage payments. Be certain that
increased rents will cover these larger debt service amounts. And keep in mind
that you may also have higher municipal taxes if your improvements were taken
into account during a tax reassessment.
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