Learn why investing in a multifamily dwelling — a condo, duplex, or townhouse — can be a smart choice.
With interest rates at historic lows and a strong rental market encompassing much of the country, people are investing in real estate. Many investors automatically think “single-family home” when they set out to buy a property, and while this may be a smart move in cities where the rental market is hot, like Austin, TX, or Provo, UT, there are definite advantages to buying multifamily real estate that should not be overlooked.
Here are six tips from real estate pros on why buying a condo, duplex, or townhouse can be a wise decision.
1. There’s less maintenance with condos and townhouses
If you’re buying a property with a homeowners’ association (HOA) that takes care of the exterior, you’ll have fewer landlord responsibilities on your plate. With condos and townhouses, everything outside your own walls is typically considered a common area, which your HOA takes care of using the dues you pay. These common areas usually include the landscaping around the building, the roof, parking garage, and amenities such as a pool and clubhouse.
Remember to factor in the monthly HOA dues before you invest: Dues in condo and townhouse communities could run you hundreds of dollars per month. “HOA fees often cause rental property to be a net loss every month,” says Lucas Machado, president of House Heroes in Florida. If you can still come out ahead after crunching the numbers, the next step is to make sure the HOA has adequate reserves. Do this by “requesting financial statements from the HOA,” says Machado. If the HOA is poorly run, you could be charged a special assessment fee to pay for a major expense. Finally, make sure you even can rent out the unit. “Renting out a condo or townhouse may not be possible under HOA rules,” says Machado.
2. You can save on taxes and insurance with a duplex
Think of buying a duplex as snagging a deal at a BOGO sale. A duplex is really one structure, but one that has been divided into two apartments, either side by side or upstairs/downstairs. As such, when you buy a duplex as an investment property, you can rent out one of the units and live in the other, or you can rent out both units. Maryland resident Maria Moser owns a duplex and reaps the benefits. “It is deeded together, so I have a single county/state tax payment and a single city payment as well as a single insurance payment,” she says. And there’s another bonus: “With two rents coming in, one [unit] can be vacant without any issues.”
3. It’s easier to get started in investing with a duplex
You typically need a bigger down payment to buy investment property than you do when buying a property you will live in. “When buying as an owner-occupant, a buyer may only have to put 3% or less down, while investors usually have to put at least 20% down,” says Mark Ferguson, a Colorado real estate agent and creator of InvestFourMore, a real estate investment website.
If you don’t have the down payment funds to buy investment property, you can still get in the game by buying a single-family home and living in it for at least a year (or whatever the lender requires) and then renting it out. “But most banks will not count rental income right away,” says Ferguson. “This can make it tough for investors to buy another house right away — their debt-to-income ratios will be high due to two house payments.”
To put this owner-occupant practice to work for a duplex purchase, you’d live in one half of your duplex and rent out the other. “When buying multifamily, rent is coming in while the buyer lives in the property, which will cause the rental income to be counted sooner and make it easier to buy another home,” says Ferguson.
4. You could make more money with a multifamily unit
The potential to earn more money — otherwise known as having “greater cash flow” in investor lingo — can be greater when you buy multifamily homes for sale. “The rent-to-purchase price ratio is almost always much better with multiunit investments,” says Casey Fleming, author of The Loan Guide: How to Get the Best Possible Mortgage. “I own a four-plex in Albuquerque [NM] and a condo in Rio Rancho, a suburb. They provide cash flow much better than a similarly priced single-family would have.”
5. Your odds of being on the “corner of Main and Main” are greater with a condo
To be successful in the landlord business, you need to own property in an area where people want to be. “Proximity to universities, colleges, and urban areas will always provide a steady stream of people who want to rent,” says Shawn Felker, a New York, NY, agent. Typically, you can get the best location, particularly in a big city, when you’re buying real estate in a building. By being in a building or complex, you may also be able to snag a condo with unique views or other appealing amenities, like a community pool, that will attract potential renters. This is where buying a condo can be a great choice — and the home’s value can appreciate significantly over time.
6. You’re looking for retirement income
Baby boomers have always broken new ground, so as this group approaches (or is in) their retirement years, they’re redefining the way they live. Many boomers choose to live in age-55-plus retirement communities. Others prefer to rent, so a shared-housing arrangement can present a great investment opportunity for homeowners. Empty nesters who have plenty of spare bedrooms can rent out one or all of them to fellow retirees, creating a sort of Golden Girls situation. If you do this, make sure you have a lease and specify house rules, such as a laundry schedule, which food will be shared, and who pays for which utilities.