Living in a multi-family home while renting other units is a great way to build wealth, but it's not as simple as some make it sound. Read this before you even consider buying a duplex or other multi-family unit.

One of the smartest ways to build wealth is by buying real estate (particularly rental properties); just ask Warren Buffett. He was recently quoted as saying he’d buy “a couple hundred thousand single family homes [as an investment]” right now if he could.

Buffett realizes the value that rental properties can bring not just in terms of monthly cash flow but also in appreciation and deductions.

But let’s face the facts here. Most of us can’t afford to buy a few single family homes as rentals while affording our own home, let alone buy a couple hundred single-family homes. This is why there has been a recent trend in home buyers purchasing duplexes or even multi-family units to live in one of the units while renting out the others.

From my perspective as both a Realtor and a landlord, here are some things to keep in mind.

1. Buying a multi-family home will limit your location options

If your goal is to get a duplex, triplex or quadruplex to live in one part and rent out the other or others, you may be limited in terms of the locations that you’ll get to choose from.

For example, where I work in San Diego, multi-family units really aren’t found in many of the suburban cookie-cutter type neighborhoods. To find one in San Diego, you’d have to look in the more urban/downtown type areas or expensive beach communities like Ocean Beach or Pacific Beach.

You might have an even more difficult time finding a multi-family unit that you’d be happy living in if you live in a more rural part of the United States. But if you’re not extremely picky about the neighborhood you live in now, this could be your opportunity to get in and make some good money over time.

2. Newton’s third law of multi-family real estate

“For every benefit to owning a multi-family property, there is an equal and opposite reaction.”

The main benefit of owning a multi-family unit and living in one of the units is rental income. Every month you’ll get a rent check that offsets your mortgage.

One downside? Tax complexity. Just look at all the IRS rules regarding investment properties. Always consult your tax professional prior to making a large investment purchase, especially one that you expect to make deprecations and write-offs from.

Another benefit of owning a multi-family unit and living in one of the units while renting out the others is that you’ll always be close to your rental properties so that you can check on the condition frequently. If loud music is being played late at night, you’ll be the first to know about it. If a pipe bursts or a toilet is clogged and your tenants need assistance, at least you won’t have to make a long drive in order to fix the situation.

The drawback? You’re close to your tenants, so that loud music bothers you, not somebody else. And if you have a needy tenant, they’ll have easy access to you to voice their complaints.

3. Financing a multi-family home is tricky but doable

It may seem impossible to buy a duplex or multi-family unit with your budget, but the reality is it might not be as hard as you think.

According to Anthony Lococo, Vice President of Cornerstone Mortgage, “If buying an owner-occupied duplex, you would definitely be able to use [the potential] rental income from the second unit” to help you qualify for the purchase.

For example, if you will be living in one unit and renting out the second, and you anticipate the second unit to be rented out for $1,200 per month, that income will be factored in to the lender’s qualifying ratios.

How do you know what the second or additional units will rent out for? If you don’t already have a lease in place (which you probably don’t), check rentometer.com for average rents in the area and use craigslist to help you verify rental prices for similar units. Keep in mind, the potential rental income may help you qualify for the loan, but it’s not the only factor to be considered.

You’ll still need to have good credit, a low debt to income ratio and a large down payment, typically around 25% of the purchase price or more. On a $500,000 duplex, you’re looking at a down payment of $125,000, not including your closing costs such as escrow and loan fees.

Use this calculator to figure out your debt to income ratio.

Check out this list of the top lenders on the market today providing mortgages with varying terms and totals. This will be a great way to start the search for the best ways to finance your new purchase.

4. Getting insurance for a multi-family home

Duplex life requires specialized insurance, targeted toward the unique needs of multi-family homes. If you’re renting out one or both units of your duplex, landlord insurance can help protect you. On the other hand, if you plan to occupy both units, homeowner’s insurance will cover you.

Below are two affordable options for duplex owners.

Lemonade Insurance

So, You Wanna Buy a Duplex? 6 Things to Know About Multi-family Homes - Lemonade

Duplex owners planning to rent should first look into landlord insurance. Lemonade offers policies for landlords in New York, Illinois, Texas, Pennsylvania, DC, and New Jersey, with premiums starting at $25. It covers damage to the dwelling, any property you’ve placed in the unit, loss of use, and liability protection.

For non-renters, Lemonade offers homeowners insurance to cover the dwelling and all your possessions. Through the easy-to-use platform, you can get a quote in minutes.

Whether you’re a renter or a landlord, Lemonade’s transparent fee structure sets it apart from other insurers. They take a 20% fee from each premium payment to cover basic operational costs. Any amount they don’t use is put toward charitable causes championed by their customers.

Policygenius

So, You Wanna Buy a Duplex? 6 Things to Know About Multi-family Homes - Policygenius

Another homeowners insurance option for duplex owners is Policygenius. With the Policygenius platform, you input your information and, in minutes, get quotes from multiple top-rated insurers.

But one of the best things about Policygenius is its annual reevaluation of your policy. Each year, your policy will be re-shopped to ensure you’re getting the best rates available.

During the application process, you can chat with a representative for guidance. This is optional, but it’s a handy option for those who like a more one-on-one approach to insurance.

5. Is it even legal?

If you can qualify, lending guidelines for multi-family units are straightforward. One thing can pose a problem, however, according to mortgage broker Anthony Lococo. “[W]hether or not the second unit is permitted. Just because it produces income doesn’t mean it’s considered a “unit”. Granny flats are a good example…”

Most real estate agents can tell you how hard it is to tell a house with an unpermitted granny flat. Financing can be even more difficult. If the property is not an actual duplex, just a single family house with a large wall partitioning areas and two separate kitchens, lenders may not be able to consider the potential rental income in your qualifying ratios, even if you can, in fact, rent it out.

6. What if you want to move out someday?

If you buy your multi-family unit with the intention of living in one of the units, the time may come when you’re ready to move out and get something bigger. In that case, you may choose to sell the multi-family unit. If you don’t absolutely have to sell it in order to qualify to buy the new house, consider getting a tenant in the unit you were living in and keeping the whole thing as a rental. Having already been a landlord for your neighbors, being a landlord for one more family won’t be too much of a shock.

When I was 21 years old (before I was a real estate agent), I bought a house with an unpermitted granny flat, lived in the house and rented the granny flat out. It did produce some nice income that made my mortgage payments a lot lower. As I started a family and wanted to live in a different area I finally sold that house and I can honestly say I’ll never buy a house with an unpermitted granny flat again! It was challenging to sell because despite having interested buyers, some lenders were not willing to finance it.

What’s your story? Have you ever owned a multi-family unit or have you considered buying one? Let us know your experience in a comment.

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About the author

Total Articles: 37
Sarah Davis is a real estate broker in San Diego, Calif. She enjoys helping both buyers and sellers and was voted one of the top 10 best real estate agents in San Diego in 2013 by Union Tribune readers. In her spare time she talks about real estate on a local radio show and manages her website RealtorSD.com.

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19 comments
Brad says:

Yea 24 now looking at a few 4 pled near me with va loan sense it’s my first time being serious about it it is a bit scary been looking up landlord laws and such don’t want to make any mistakes or minimize if I can

Ana says:

So what happens tax wise, after you live in one of the duplex Units while renting the second, and then decide to sell it to buy a bigger personal home?

Peter says:

Why do you say 25% downpayment for an owner-occupied 2/3/4 plex? Isn’t it closer to 5%? Or even 3.5% under FHA?

Seth Schere says:

In south florida I had to put 25% down even with an FHA loan because it was a multi-family unit. This was in 2012.

Sam A says:

This may be an old post but I can assure you that multi-family house is the smartest thing you’ll ever do. I bought my while I was 27 and it pays for itself and brings in good cashflow after paying off my mortgage. I’ve had the house for 2 years and I’m looking to purchase another multi-family. Multi-family will sell no matter what. Just make sure that it’s a legal mutli-family.

Jim F. says:

I inherited a 2 family home which is about 70+ years old…and live 90 minutes away. it is a nightmare. Going to sell.

Seth Schere says:

I agree with you. owning a duplex is the smartest thing I have ever done financially. Our hope is to purchase another one.

Nathan Lindley says:

I cant recommend multifamily strongly enough! My wife and i bought our first home as a 4-plex and were able to live there for free while the other units paid our mortgage. 2 years later we got a heloc, cashed out some equity and bought a very nice home! The unit we were living in now serves as surplus. Ashflow whicj pays half the mortgage on our new home! My out-of-pocket payment on my new beautiful 4 bedroom, 2600 sqft house is less than any of my friends 2 bedroom apartments.
I tell ALL my friends to buy multifamily properties! And i am telling you, it will change your life!

anon says:

This article shouldn’t even be searchable on the internet. Currently own a multi and this article is completely non informative

Nathan Lindley says:

Amen

Prateek says:

Hi, off topic but will you suggest buying a property cash vs mortgage?

Nathan Lindley says:

Mortgage. Way, way better roi. Especially right now (ealry 2016) rates are so low its as if the banks were giving away money. Of course there llis an increased risk, but if you are sitting on enougb cash to buy it outright, you have everythinf you would ever need to weather the storm…

anon says:

Exactly how were you able to purchase your first house at 21, only being separated from high school by 3 years?

Britney says:

I bought my first house, all on my own, at 20. It is not impossible to do.

Tim says:

I’m looking right now, will be purchasing in the spring right around when I turn 22

Wiilliam says:

I bought my first house at 21. it appraised at $120,000 but we were able to get it for $85,000. It was in a crappy neighborhood across the street from an apartment complex and two houses up from a drug dealer. All of our friends at the time were buying tract homes in good neighborhoods paying $300,000+ and maxing themselves out. Two years later we sold our house for $232,000 and bought another home for $240,000 with $150,000 down. Still not in the greatest neighborhood but much better than the first one. Seven years later in 2012 We bought our dream home for $280,000 while the market was still recovering from the crash. We held on to our previous home that we now rent out for $1500/mo. giving us $600 over the mortgage payment and our new home has a guest house that brings in $925/mo. yet our mortgage is only $1500/mo. On the flip side many of our friends who bought the $300,000 tract homes lost them in the housing bubble from overextending themselves with outrageous mortgages and equity lines that went bust. Needless to say they are now renting homes in crappy neighborhoods two houses up from drug dealers. All that being said the lesson is yes! You can buy a home three years out of high school if your willing to make some sacrifices now and buy well within your means. Save your money now and get a gas card to start building up your credit so you will have a down payment and can jump in when the next housing bubble pops. and if you can buy a home now with a mortgage cheaper than rent, by all means do it! You can always rent out one or two of the rooms to subsidize the mortgage. And by the way a duplex or triplex would be an excellent choice if you are able to find one within reason.

Josh says:

Shouldn’t Newton’s 3rd Law of multi-family real estate be rule no. 3?

Otherwise, good advice, thank you.

Lauryn says:

I’m considering my first real estate investment now. I’m torn between buying a nice condo in downtown LA that I believe will appreciate in value over the long run (but cost me when I move in a year and rent it out at a rate below my mortgage costs) and buying a duplex in a less upscale part of town (that would require me to hire a property manager when I move). I’m trying to decide if I want to make the investment that will cost me a little per month, but get me a bigger payout in the end, or the investment that may pay for itself, but won’t necessarily appreciate in value. Any advice would be welcome!

Benjie says:

It’s an old post, but just curious. Did you end up buying a condo in DTLA? Or did you buy units?