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What is a Multifamily Home?
In real estate investing you’ll commonly hear terms like “single family home” and “multifamily home”.
In short, a small multifamily home is one that have multiple residences, but they are all attached. Think of a duplex, triplex, or quadplex. A single family home is simply a house where there is only one residence, or address.
What is House Hacking?
A house hack is an investment in real estate that is designed to lower your housing costs in the short term.
It can be done in multiple ways, including renting out a room, renting out your home on sites like Airbnb, having an axillary dwelling unit, and owning small multifamily units.
5 Steps to Finding and Buying a Multifamily House Hack
The following 5 steps are important when considering buying a multifamily home as a house hack:
- Communicate with a lender
- Get your finances in order
- Learn your area
- Find a real estate agent and a management company
- Buy your multifamily property!
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1. Communicate with a Lender
To get the process started to buy your multifamily house hack, the first step is to set up an appointment with a lender.
The reason for this is that you must know if there is anything you must do in order to qualify for a loan.
Getting a loan for a multifamily property is a bit different than just a primary single family residence, so you need to know how it will fit in your unique personal financial situation!
For example, the lender can look at your credit. If your credit is far too low, you could be given the notice that you cannot get a loan for buying a multifamily unit.
Be sure to learn how to quickly improve your credit before buying a rental property!
Also, they can inform you that your debt to income ratio is too high for them to provide you a loan. This would mean that you’d need to pay off loans, such as a car loan, before you can apply and get accepted!
Additionally, if you work as a contract worker you may have to wait a specific amount of years in order to show proof of income to get a loan for your rental property.
Can I buy a multifamily home as a first time home buyer?
You can buy a multifamily home as first time home buyer. Review this breakdown of loans:
- Owner occupied loan: You cannot use a conventional owner-occupied loan on a multifamily rental property because it only applies for a single-family residence.
- Conventional loan: A single family rental’s conventional loan requires at least 20% downpayment. However, a downpayment with this type of loan for a multifamily can be a minimum of 30%.
- FHA loan: You can use an FHA loan to purchase a multifamily unit, and it would require only around 3.5% down. Since it is a government-back loan, there are a few stipulations that require the property to be livable – keep this in mind because if you use the BRRRR method for rentals, many multifamily units won’t qualify for an FHA due to their rough condition.
Can I buy a multifamily home with no money down?
There are multiple ways to buy a multifamily home without money down, or for very little cash.
I’d suggest you check out these two books for in-depth explanations for this component of rental investing:
One way to spend less on rental units is to use an FHA loan, which requires 3.5% down. This is much less than the 25% for a conventional loan.
If your finances and lender allow for it, you can use a loan under yourself then the next property under your spouse, for example, in order to save on two properties. Keep in mind however, that you can only have one FHA loan under your name at once.
When you refinance and turn your FHA into a conventional loan, you can qualify to another rental property under an FHA.
2. Get Your Finances in Order
These 5 tips can help you significantly improve your financial situation:
- Track your Finances
Go download a free app and start tracking your finances and net worth! It is important to fully understand your financial situation before investing.
Check out a full review of the free budgeting app I use here!
- Learn how to Budget
Housing tends to be one of the highest fixed expenses in an American budget, taking up approximately 33% of a budget.
It is important to realize that investing of any kind is risky and takes money. You need to make sure to have a solid grasp of your money, and an understanding of cash flow!
Here are a few articles to review!
- 5 Unique Budgeting Skills All New Investors Need to Grow Wealth
- How to Achieve Financial Freedom using the 70/20/10 Rule
- Pay off Debt
Rental investing involves debt, if you are using a lender or borrowing cash from others. It is highly recommended from many money gurus to pay off your debt before getting more into debt.
- Save Up Money
Multifamily properties typically cost more than single family properties, so you’ll need to save up more cash to purchase one.
Here are a few articles to get started!
- Create a Separate Bank Account
It is recommended to never mix personal money with business money. Set up an extra checking account for your rental unit so your cash is used and budgeted correctly!
3. Learn Your Area
If you want to find a multifamily house hack, it is important to get to know what area of town you want to live in – but still cashflows.
These 4 tips can help you quickly find a multifamily unit to house hack:
- Speak with Local Investors: It is always advised to talk to “rockstars” who already have accomplished what you want to do. Learn about emerging suburbs and areas of interest
- Use DealCheck to Analyze Properties: Take advantage of free apps that provide extensive information about rentals. My husband and I use DealCheck to review potential investment properties.
Learn why it is smart to become a real estate agent if you plan to become a rental investor!
- Drive Around to Learn about Neighborhoods: After learning and researching areas, be sure to drive around neighborhoods – you may be surprised at how different some areas can appear on a map compared to real life.
- Look Up City Ordinances: Be aware that there may be local laws in towns or suburbs that could limit you from owning a multifamily house hack. This is an important step after you’d researched multiple areas.
4. Find a Real Estate Agent and Management Company
Real Estate Agents for Multifamily Properties
It is usually recommended to use a real estate agent that has experience with investors.
Be sure to read about my unfortunate experience with NOT using an experienced agent.
You’ll save yourself headaches and potentially a quite bit of money by doing some research, asking around, and finding an agent who has experience with local
Management Companies for Multifamily Properties
My husband and I personally use a property management team, but know that it is not required.
If you are very busy, are uncomfortable with confrontation, or don’t have connections with contractors, you may consider using a management company. Yet, many investors and house hackers get by just fine without a property manager!
Make sure to learn all about the benefits of having a property manger for your multifamily rental!
5. Buy Your Multifamily Property and House Hack!
By the time you choose and purchase your multifamily unit, you will have already done extensive research into what area you want to buy in, connected with an experienced real estate agent, met with a lender to discuss and learn about getting a loan, and got your finances in check.
House hacking is the fun part! You’ll have the opportunity to move into one of the units within the property all the while earning from the other tenants, and reducing your overall cost of living.
There are plenty of small steps along the way to actually moving into your property, screening and finding tenants, collecting rent, and more. But getting to this point is worth celebrating!
How Can I Keep Learning about Rental Investing?
Check these out to learn more!
