Shopping for your first home and wondering: Should I buy a multifamily? Only a small percentage of home buyers go after a multi-family property as their first home. There are so many advantages to buying one… and, naturally, some reasons why many people never think about this path. 3 big deterrents:
- It’s too daunting (i.e. Not sure how to be a landlord, too much house, etc.)
- It’s too expensive
- Ignorance – “what is a multifamily?”
While perhaps it’s a bit easier said than done, buying a multi unit property can be a fantastic strategy to fast-track your way to that dream home that you thought would take decades to afford!
Prior to dating a real estate agent, I believed all 3 of the above points. It wasn’t until he showed me the numbers, specifically how the rent from just 1 unit could cover 60% of our mortgage while we lived in the second unit, that I was turned onto the idea of owning a multi-family.
But there are additional benefits beyond just having your mortgage payment significantly decreased. Buying a multi-family, specifically one that needs a bit of work, can increase your buying power 10x. Never in a million years did I think that I would be 27 and looking at buying a $2M property! But now, with the equity that we have created in our multi-family property, that dream has become an increasing reality.
So, what are the steps that go into increasing your buying power through owning a multi-family? Let me lay them out for you!
Step 1: Find A Deal
The first step in most processes is the hardest and in this method, there’s no exception. Finding a great deal in real estate is like finding a needle in a stack of needles. My advice here would be:
- Look for properties that have been on the market for a long time. The longer a property has been on the market, the more likely the seller is to entertain a discount.
- Offer low. The worst that can happen is that the seller comes back and says no. And more likely than not, it will just lead to a negotiation that will hopefully end in your favor.
- Ask around. It’s relatively rare to find a deal this way however, you never know if your 90 year old neighbor is wanting to sell their multi-family home off market for less than market value to a familiar face because it’s too much upkeep. It doesn’t hurt to ask!
In my case, we found a property that had been on the market for 60+ days. We offered $300,000 (27%) below the asking price and included a list of reasons why we came to this number. After many negotiations, we got it for $230,000 below asking.
Don’t get discouraged if your first (or second or third) offer does not get accepted. We were lucky in the sense that we only made offers on 2 houses before we struck a deal. Some people make 10+ offers before one finally lands and sometimes it’s just meant to be.
Step 2: Sweat Equity
Now that you’ve acquired your property, it’s time to roll up your sleeves! If done right, this step can be fun and exciting, but if done wrong, it’ll be the step that makes you regret your decision to buy a fixer-upper multi-family in the first place.
For us, it was a mix. We had a 6 week timeline to gut remodel two kitchens, strip 6 layers of wallpaper off the walls of 7 rooms, tear up carpet throughout an entire 1,400 sq. ft. unit, sand and paint wood trim, paint walls and ceilings of 10+ rooms, meticulously clean both units and then move in. A walk in the park! The majority of this work we were able to do ourselves but putting in cabinets and cutting countertops was a job for a professional.
Some advice I have for this step would be:
- Shop around but not too much. It’s important to look for different options at different price points when it comes to backsplash, faucets, paint, etc., but don’t shop too much. Spending too much time making these decisions can take away from time you could be spending on actually installing the backsplash or painting the walls.
- Don’t go with the cheapest option. While it might be tempting given how much you just spent to buy the property, there’s typically a reason why it’s the cheapest. Our policy was to always go for the second or third cheapest and so far, it’s paid off.
- Don’t get discouraged. There will be many things that don’t go your way and many unforeseen expenses (like a cracked pipe that resulted in $5k worth of new plumbing), but in the end, it’ll not only all work out, it’ll pay off!
Just because you’ve never done it before, doesn’t mean you can’t! When we first started, I could not fathom how I, an email marketing associate, was supposed to renovate a house. I had never stripped wallpaper or painted a wall or changed an entire light fixture. However, YouTube!! And worst case scenario, you hire someone to install your chandelier when you realize it’s way above your paygrade.
Step 3: Refinance
The critical turning point in this strategy lies in the refinancing step. By leveraging the increased property value that is a result of renovations, you can refinance your mortgage and pull out a portion of the property’s equity as cash. This influx of capital can then be used to fund the purchase of another property!
Now that the value of our property is ~$250k greater than what we paid for it (a reflection of both the renovations and the market), we will do a cash-out refinance. Unlike a typical refinance where you are just refinancing your mortgage at a lower interest rate, in a cash-out refinance you are pulling equity out of your property and getting a new mortgage for a larger amount.
There are a number of pros and cons to doing this so I would advise contacting your lender to ensure it’s a good step for you. However, if all goes well, you could walk away with a lump sum of cash in your hand and a monthly payment that has only increased slightly (as long as rates are in line with your initial mortgage).
Step 4: Buy your dream home! Or do it all again!
Now you can finally go after that dream home you previously did not have the capital to go after! If you were previously living in your multi-family, the money you’ll be able to collect from renting all the units will hopefully cover your entire mortgage on the property plus some extra. That additional money + the capital you pulled out of the property will allow you to purchase your dream home and comfortably make the monthly mortgage payments.
Another alternative is to start the process all over. This time, go for an extra unit…or two! If you started with a 2-family, seek out a 3- or 4- family. The more units you can acquire, the lower you can typically get the payment on the unit you occupy.
If you’re considering going down the multi-family path too, but still have some questions about the process, reach out! I would love to provide answers, dive deeper into my experience, and share more of the tips, tricks and house hacks that I’ve learned along the way!
