Pros and Cons of Owning a Multi-Family Home 

What are the pros and cons of owning a multi-family home? Here are the top advantages and drawbacks of multi-family homes if you want to purchase one. 

Whether you are looking for a new place to live or a way to start real estate investing, owning a multi-family home is a great option. A multi-family home is a residential property type with multiple housing units that allow more than one family to live separately within the same building. 

Popular multi-family home types include duplexes, triplexes, and fourplexes. Townhomes, condos, and apartment complexes can even be considered multi-family properties. Multi-family homes are unique since they each have their own entrance, kitchen, bedrooms, bathrooms, and living areas, but they may share walls with other units within the building and have their own unique address. 

Though separate, sometimes multi-family homes can share common areas such as hallways, stairwells, a garage, and outdoor spaces. Most popular in large cities and urban areas, multi-family homes are increasing as more homebuyers seek affordable housing and ways to generate more income. 

If you are interested in purchasing a multi-family home and intending to live in it or find tenants, knowing the pros and cons of owning such a property type is essential. Though multi-family homes offer many benefits to homeowners and residents alike, understanding their risks and drawbacks will ensure you know what to expect before buying one. 

Cities like Raleigh, with a growing population and strong renter demand, are perfect for owning multi-family homes. Continue reading to learn about the pros and cons of owning a multi-family home so that you make a well-informed purchasing decision.

Check out these benefits and drawbacks associated with owning a multi-family home 

1. Pro: Great Opportunity For Passive Income 

One of the main reasons that a homebuyer may choose to purchase a multi-family home is for its rental income potential. Since multi-family homes are known for having multiple residential units within one building, homeowners can either live in one unit and rent out the others or rent out all units to tenants. 

When units are rented out within a single property, owners benefit from a consistent stream of rental income, which can be used to pay off the mortgage on the home. Since the units are located within one building, this can increase potential earnings and generate higher cash flow than a single-family home. 

Even if there is a vacancy in one unit, you will likely still have cash flow from the other units, making multi-family homes a fantastic investment opportunity. Make sure to analyze the local market, rental demand in the area, operating expenses, and rental income potential for deciding to purchase a multi-family home in a particular area if you plan on renting out its units. Rental income should exceed the costs to maintain the property for it to be a good investment.  

2. Pro: Scalable 

Multi-family homes are considered highly scalable and are a great way to add to a real estate portfolio more quickly if you plan on renting out more than one unit. Instead of purchasing multiple single-family homes, real estate investors can buy one multi-family home and acquire more units within a single property. 

By requiring fewer transactions, investors can stay cost-effective and benefit at the same time by expanding their portfolio. Since real estate investors are technically only owners of one property, it is easier to centralize maintenance, repairs, and marketing instead of spreading it out across multiple single-family homes. This is especially important since approximately 45% of property owners choose to manage and care for their properties. 

3. Pro: Opportunity For Tax Benefits 

Everyone loves a good tax benefit, and owning a multi-family home means you can take advantage of certain tax breaks. Certain costs such as maintenance, repairs, utilities, property management fees, insurance, marketing, and operation costs can be deducted during tax time. Multi-family homeowners who actively manage their potential tax liability can benefit from higher returns than those who do not. 

According to Forbes, it is reccommended that multi-family homeowners maximize depreciation through cost segregation and deferring capital gains taxes through 1031 exchanges, which allow owners to reinvest the proceeds into another property that is of the exact nature and character as the original one. 

Since most physical assets do not appreciate over time, real estate depreciation allows property owners to recover the cost of a real estate investment as it loses value over time through an income tax deduction. Multi-family properties have a depreciation period of 27.5 years. 

4. Pro: Increases in Value Over Time 

Multi-family homes are a great property type known to increase in value over time. While they may not appreciate as fast as a single-family home does, they are great investments since they can generate rental income. As long as rental demand remains strong, the value of a multi-family home will increase steadily. The market demand in a specific location can also help boost a property's value. 

While there is no guarantee that a property's value will rise over time, multi-family homes are more resilient to economic downturns and fluctuations than single-family homes due to rental demand. This economic resilience can play a significant role in boosting its overall value. 

5. Pro: High Occupancy Rates in Large Cities 

While multi-family homes are found nationwide, they are most popular in urban areas since they maximize land use and provide a more affordable housing option in otherwise expensive cities. New York City is known to have the most multi-family homes in the United States, with 52.7% of its housing classified as multi-family. Other cities with many multi-family homes include San Francisco, Los Angeles, Boston, and Seattle. 

If you plan on buying a home in a large city, you will benefit from high occupancy rates because of high demand. Multi-family homes have existed since the mid-1800s but have recently gained popularity and value in smaller to mid-size cities. They are a go-to housing option for young adults trying to save money, small families who do not have a lot of room, and multigenerational families who want to live near each other. 

6. Pro: Living With Friends and Family 

Another pro of owning a multi-family home is living near friends and family without sharing a living space. If you have a big family, buying a multi-family home could be the perfect way to save money while knowing who you will share a wall with. In this case, multi-family homes are a great way to reside with people you love and care about while maintaining space and privacy within your unit. 

Similar to a co-living situation, you will reap the benefits of having private bedrooms, bathrooms, a kitchen, and a living room. Still, you will be able to share expenses and foster a strong sense of community without having to leave the building. 

7. Con: Greater Initial Expense 

Multi-family homes typically have higher initial expenses than single-family homes. Depending on the property's size, location, and condition, they tend to be quite pricey. They are also challenging to acquire due to the higher upfront cost and stricter loan requirements.

Many multi-family homes can cost more than one million dollars and require a larger down payment than a single-family home, often between 15% and 25%. If you are applying for a conventional loan, it is recommended that you have a credit score of 660 or higher. 

8. Con: Competition 

Since multi-family homes are solid investments and offer many benefits to buyers, purchasing one can often be competitive, especially in large cities. If conditions are favorable, many potential investors will likely be interested in multi-family properties that go up on the market. This increased competition can lead to even higher prices and buyer bidding wars. 

9. Con: Challenging to Manage 

One of the biggest drawbacks of owning a multi-family home is that it can be challenging to manage, especially when dealing with multiple tenants. Since property management is such a big task for this property type, most multi-family homeowners hire property managers to help them handle day-to-day tasks, which is an additional expense. Property managers help screen tenants, deal with maintenance and repairs, and help set rules and expectations for tenants with owners. 

10. Con: Property Taxes and Insurance Rates Can Be High 

Unfortunately, owners of multi-family homes often pay more for property taxes and are known to have higher insurance rates than other properties. While multi-family homes have their fair share of advantages, such as paying only one tax bill covering all units within the building, it will likely be a higher rate. Property taxes are calculated based on the property's location and the home's assessed value. 

When it comes to insurance rates, they are also often higher since there is a higher chance of damages caused by tenants if units are rented out. The average cost of homeowners insurance in North Carolina is $2,394, which is higher than the national average. 

11. Con: It Might Be Difficult to Find Tenants 

While a multi-family home can be a great investment, depending on the location and condition of the market, it might not be easy to find tenants. If you own a multi-family home in an undesirable location with a high crime rate or lack of amenities nearby, it can be harder to attract potential tenants. 

Some other reasons tenants might not be interested in your property are that rental prices are too high compared to other homes in the area, the unit is not maintained and out of date, or the screening process is too selective. 

FAQs 

Is owning a multi-family property worth it? 

Owning a multi-family home can be worth it if you are looking for a consistent stream of extra income since you will have multiple units to rent or want to live with friends and family but still have your own privacy and personal space. 

How do you determine if a multi-family home is a good investment? 

If you plan on renting out the extra units in a multi-family home, first analyze the location, occupancy rates, rental demand in the area, operating expenses, and rental income potential to determine if it will be a good investment and worth the purchase. A great way to do this is to analyze other multi-family properties in the local market. 

What is the 1% rule in multi-family investing? 

The 1% rule in multi-family investing is considered a good rule of thumb to follow that estimates if the cost of the rental income of a property will cover the cost of owning and operating a property each month. According to this rule, the monthly rent should be at least 1% of the total purchase price, plus expenses for necessary repairs. 

Methodology 

To help determine the pros and cons of owning a multi-family property, data and information were collected from Forbes, Bankrate, Doorloop, Construction Coverage, LinkedIn, and Experian. 

Pros and Cons of Owning a Multi-Family Home - Final Thoughts 

Owning a multi-family home has many benefits, but it also has its fair share of disadvantages that need to be considered. While multi-family properties provide an excellent opportunity for passive income, they are often expensive and difficult to manage. Understanding what a multi-family home can offer while considering its risks is essential for any homeowner and real estate investor. 

If you are considering purchasing a multi-family home and are moving to the Raleigh area, the experts at Raleigh Realty are here to help. The number of multi-family units is rising in the Triangle area, and demand is expected to continue over the next few years. Contact us today to find your dream home.