Investing in a multifamily house can be a good way to build home equity. You can stay in one unit of the multifamily house and rent out the other unit or units or you can rent all of the units to paying tenants. Either way, there are a number of benefits to owning a multifamily house as well as a few drawbacks.

Buying a Multifamily House

By definition, a multifamily house is considered a living structure that contains separate living quarters for two or more families. A common type of multifamily house is called a duplexe and it contains two separate housing units. There are also triplexes and quadplexes which have room for 3 and 4 families respectively. Today’s mortgage rates are near historic lows so now is the time to think about buying an investment property. You will have to have excellent credit and a steady source of income to qualify for a loan. In today's economic climate and with the recent history of the housing market, lenders are much more selective in extending mortgages. Assuming you qualify for a loan and get funding for the multifamily home, you are now ready for the next step.

Finding Good Tenants

Once you have finished with the closing and been handed the keys to your new investment property, you are ready to start looking for tenants. You can do this on your own or if you prefer, hire the services of a professional realtor or other company that specializes in connecting landlords with tenants. It may cost you a month's rent, but getting well qualified tenants that will pay their rent every month is well worth the added expense.

Generating Cash Flow and Building Equity

A successful multifamily house will have good-paying tenants occupying all of the units of the house. The rent should, at a minimum, cover the mortgage payment, taxes and insurance. With today's low interest rates, you should be able to have some additional free cash flow. As your tenants pay you each month, you are using some or all of that money to pay down your mortgage. Combining monthly payments with probable price appreciation, over the years, you will build equity in your property. You can use a calculator to get a good idea of how much rent you need to charge and how long it might take to pay off the mortgage.

The Downside

While a multifamily home can be a great investment, you should be aware that being a landlord can be a bit of a headache. You will need to keep tenants in your units as much as possible and you also will be responsible for repairs. As long as you have good tenants, you should not have any major problems.

Published on November 10, 2009