By the Numbers: Why Buying a Small Multi-Family Property May Be the Right Move for You

While many people see themselves as aspiring business owners and entrepreneurs, many others start business ventures as part of a natural progression in their own personal financial lives. Simply put, people often become business owners and get involved in real estate investing to make money and save money. Many have realized, for example, that owning and living in a small investment property with up to four housing units can do exactly that, save you money on rent and other expenses while providing you a stable second income.  

Not surprisingly, there are real benefits and potential pitfalls to owning a multi-family investment property. Before we discuss a couple of interesting scenarios for you to consider, here are some tips to keep in mind:

  •  When you own investment property, especially rentals, make sure that your personal assets are protected and insulated from your real estate investing. Whether you acquire properties through an LLC or under your own name, you should strongly consider purchasing umbrella insurance, landlord insurance, or some similar type of coverage that will protect you in case you get sued related to your investment property. It’s not a pretty thought, but it is better to be prepared just in case.
  • As with any business venture, you need a solid business plan in place. Not only do you need this information for your lender, but you really set yourself up for failure if you do not spend some time developing a realistic set of financials. For a small rental property, we recommend that you put together an acquisition and start up budget to analyze both the sources of funds you are bringing in (cash, loans, etc.,) and the costs associated with purchasing the investment property and getting the property ready to operate (repairs, upgrades, etc.,). The second essential piece of information you are going to need is a cash flow analysis that looks at income and expenses over the long haul (10 to 20 years for a long-term investment).

Costs and Benefits of Renting, Purchasing a Home, and Owning Investment Property Over 20 Years.

Rent vs buy chart comparison

In the chart above, our TMS research suggests that renters spend the most money for housing over a 20-period. Home owners saw lower costs, and live-in landlords benefited from free rent and tenant revenue on their investment property.

How to Get Started

One great way to get yourself started in real estate investing while saving you and your family money is to take advantage of the Federal Housing Administration's (FHA) mortgage loan program. Here’s how it works: local banks and credit unions offer loans that are insured by the FHA. Because the loans are insured by the federal government, the banks can offer the borrower lower interest rates and make it easier for them to qualify for the loans. FHA loans can be used to purchase a one-family home as well as properties with up to four units. To qualify for the FHA loan, you must live in one of the units. Also, you must purchase the property in your own name (no LLCs allowed).

Here is a link to some helpful information on the FHA Loan Program from Bank Rate.

Comparison: Rental vs. Home Ownership vs. Multi-Family Investment Property

Rent a home vs buying comparison chart

In our own analysis comparing renting, purchasing a single-family home and purchasing a multi-family investment property through the FHA Loan Program, we show that there are clear advantages to owning a property as a resident-landlord, when the property is effectively managed and maintained. Our research suggests that the purchase of a two-unit property has the high potential to allow the landlord to cover costs on the property while enjoying rent free living. With the purchase of a four-unit investment property, our analysis indicates that the likelihood of generating positive cash flow increases; and the landlord can benefit from both free rent and a predictable source of income.

Just some last things to think about:

  •  There are significant cost and tax advantages to owning a small multi-family investment property. The IRS can show you how to take advantage of all the tax benefits you are entitled to and how to manage your investment effectively.
  • Many communities have grant programs that landlords can apply to that assist with the cost of façade improvements, green space and energy-efficient enhancements.
  • If the investment property is adequately maintained, it can be resold or remarketed in the future and generate even more financial value for the owner.

While real estate investing is not for everyone, there are clear advantages to acquiring a small multi-family property for those that have the interest and the motivation. We at TheMoneyShelf.com are happy to be able to offer research, access to real estate books and other financial publications, and insight from our in-house team of experts that you can use to make informed financial decisions.

John Florio, MBA 
TheMoneyShelf.com

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