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Published: Feb 14, 2023 10 min read
Side by side multifamily home

The high cost of housing has made it seem impossible for many young millennials and members of Gen Z to buy their first homes. One possible solution is an arrangement that's worked for many generations in the past: Buy a duplex or triplex, live in one unit and find tenants to pay enough rent to cover the mortgage.

It's an ideal setup for some buyers, at least in terms of making homeownership affordable, but there can be some major drawbacks. Finding the right property to buy can be difficult, for one thing, and becoming a landlord is certainly not for everyone.

Buying a multifamily unit and serving as landlord

When Ryan McManus and his wife were expecting their first child in 2017, they slept on the couch in a studio behind his office on South Street in Philadelphia. They weren’t starving – they were house hacking.

“I bought a vacant storefront on South Street, a duplex with a tenant living upstairs,” says McManus, a real estate agent with Compass real estate brokerage in Philadelphia. “We fixed up the office, moved into the studio and did a gut renovation on the upstairs unit, which we lived in for a little while.”

McManus and his wife then purchased a triplex nearby, renovated it, moved in and rented out two of the units.

“The biggest reason to buy a duplex, triplex or quadplex and live in one of the units is that you can usually have your mortgage covered by your rent collections,” McManus says.

Of course, the biggest downside is that you’re sharing a wall with your tenants, says Dawn Ryan, a senior loan officer with Embrace Home Loans in Middletown, Rhode Island, who also owns investment properties.

“That brings a whole new layer to the concept of ‘love thy neighbor’ when you have to enforce the lease agreement and collect the rent from someone you’re essentially living with,” Ryan says.

Buying a place with two to four units is not as easy as it looks — especially if you’re not cut out to be a landlord.

“Multifamily properties are often more expensive than single-family homes, so you need to be prepared for a bigger financial obligation,” says Richelle Taylor, a real estate investor and agent with RE/MAX Results in Brooklyn Park, Minnesota. “You’re also stepping into homeownership with a steep learning curve if you’re a first-time buyer purchasing a multifamily home that needs work.”

Here are five things to consider before buying a multifamily property.

You need to find the right multifamily property to buy

Depending on the neighborhood where you want to live, it may be difficult to find a duplex or building with three or four apartments. Another option can be a property with an attached or detached accessory dwelling unit (ADU), such as a finished space above a garage, a cottage or a barn that’s been converted to residential use.

“If you’re looking for an investment property, the more ‘doors’ you have the less exposure you have when one tenant leaves,” says Alex Platt, a real estate investor and agent with Compass real estate brokerage in Boca Raton, Florida. “It’s safer to own two or more units than invest in a single-family home because even if one person leaves, you’ll have some rent coming in. But it’s also harder to find multifamily properties in many markets.”

Location is an important factor in your ability to attract and keep good tenants, McManus says.

“We focus on specific neighborhoods that attract young professionals, especially with higher incomes such as business owners or people in the medical profession,” McManus says.

Multifamily properties are frequently older rather than newly built homes, which could mean taking on renovations.

“Ask a real estate agent to look at comparable properties and look for something in good condition,” Taylor says.

She recommends looking for a property that needs some cosmetic work such as paint and new appliances to get a better deal.

“Whether you plan to live in the property or you’re an investor, you must have a home inspection, so you know about potential issues ahead of time,” Platt says.

Having a tenant in place can be helpful – or not

If you find a property that already has a tenant, that can make it easier to qualify for a loan since the lender can review the lease agreement and use the actual rent rather than estimated rent as part of your income.

“Having a tenant in place also relieves some of the concern about having your unit vacant,” Platt says. “On the other hand, you’re inheriting a tenant who may be paying a lower rent than you could get with a new tenant, and you haven’t had the opportunity to vet the tenant yourself.”

If you need to find a tenant, it’s important to do a background check and credit check, Taylor says. You can also hire a real estate agent to find and vet a tenant for you, which she says typically costs one month’s rent.

McManus recommends Smart Move, a tenant screening program that costs from $25 to $42 per screening.

Financing options for a multifamily property will vary

Buying a home as an owner-occupant – meaning you’ll live in one of the units – is easier than as an investor because lenders recognize that you’re more likely to pay the loan on the home where you live even if you run into financial trouble, Ryan says.

“If you’re an investor, you’ll need a higher credit score and a bigger down payment, typically at least 20%, because you’re perceived as a bigger risk,” she says.

Federal Housing Administration (FHA) loans, which are insured by the government, are the best option for most multifamily buyers because you only need 3.5% of the home price for a down payment even if you buy a home with up to four units, Ryan says. Conventional financing backed by Freddie Mac and Fannie Mae requires a down payment of 15% for a two-unit building and 25% for a three-or-four unit building even if you live in one unit.

“Most lenders will use 75% of the rent or 75% of an estimate of the fair market rent for each unit as income to qualify you for a loan,” Ryan says. “They don’t use the full amount because they anticipate possible vacancies.”

Your chances of a loan approval are better with a higher credit score (at least 700 or above) and a lower debt-to-income ratio, such as 43% or less, Ryan says. A debt-to-income ratio compares the minimum monthly payment on your recurring debt with your gross monthly income.

“But in some cases, such as someone with a high credit score or a lot of assets in the bank, you can qualify for a loan with a debt-to-income ratio as high as 57%,” Ryan says.

You may also need to demonstrate that you have cash reserves.

“How much you need is on a case-by-case basis, but I recommend at least six months of mortgage payments in the bank to cover vacancies and repairs,” Ryan says.

You also need the reserves in case your tenant doesn’t pay rent, Taylor says.

You’ll need landlord skills and maintenance funds

When you own a multifamily property, you need to be prepared for tenant calls when a faucet leaks or they’re locked out, Taylor says. She suggests keeping a list of good contractors, plumbers and electricians.

“You could hire a property manager, but most people don’t do that if they have only one or two units and they live in the house,” Taylor says.

She estimates that it costs 8% to 10% of the rent for a property manager, but that can vary depending on the services they provide.

“The biggest reason people sell their multifamily properties is that they don’t want to deal with tenants calling at 11 at night or on weekends,” McManus says. “If you live there, they know when you’re home and it can be hard to disconnect.”

You need to know the local rental rules

Each jurisdiction has different regulations about rental properties, so you need to do your research and ask your real estate agent for advice, Taylor says. Many cities have special landlord licensing requirements, too.

You could face fines if you don’t follow the landlord registration rules, Ryan says.

“Be aware of tenant laws and rent control regulations in your jurisdiction,” McManus says. “But the best thing you can do is recruit the right tenants in the first place and be a good landlord.”
Ryan recommends being conservative when it comes to charging rent.

“It’s better to keep a tenant at a $100 lower rent for the long-term than to have a vacancy of a month or more,” Ryan says.

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