What is a Multifamily Rental (Multi-Dwelling Unit or MDU)?
Multiple yet separate housing units in a single building or several buildings. An apartment building is one example, while other common examples include duplexes, triplexes, quadplexes, and mixed-use properties. In general, HUD 223(f) loans are only available for multifamily properties with 5+ uniStart Your Application and Unlock the Power of Choice$5.6M offered by a Bank$1.2M offered by a Bank$2M offered by an Agency$1.4M offered by a Credit UnionClick Here to Get Quotes!
Multifamily Rental Properties and the HUD 223(f) Loan Program
Multifamily rental properties, also known as multi-dwelling units or MDUs are multiple yet separate housing units in a single building or several buildings. An apartment building is one example, while other common examples include duplexes, triplexes, quadplexes, and mixed-use properties. In general, HUD 223(f) loans are only available for multifamily properties with 5+ units. HUD 223(f) loans can also be used for mixed-use properties, as long as commercial tenants do not occupy more than 25% of net rentable area and do not generate more than 20% of the project's effective gross income.
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What is a multifamily rental property?
A multifamily rental property is a residential building with multiple units, such as an apartment building, duplexes, triplexes, quadplexes, mixed-used properties, and independent living facilities. Smaller HUD loans, like the FHA 203(b) loan, can finance 1-4 unit properties. HUD multifamily loans, such as HUD 221(d)4 and HUD 223(f) loans, can finance apartment buildings, mixed-used properties (with limits on the amount of commercial space), and independent living units. In general, HUD 223(f) loans are only available for multifamily properties with 5+ units. HUD 223(f) loans can also be used for mixed-use properties, as long as commercial tenants do not occupy more than 25% of net rentable area and do not generate more than 20% of the project's effective gross income.
What are the benefits of investing in a multifamily rental property?
The major benefit of investing in a multifamily rental property is the guarantee of reliable monthly cash flow from renters. Since multifamily properties are rented out to multiple individuals or families, there’s a reduced risk of vacancies — even if a tenant moves out, you can anticipate rental income from the remaining occupied units. Additionally, in a strong rental market, you will be able to fill vacancies fast, getting back to the initial, higher cash flow.
Investing in apartment buildings early can be truly advantageous. The most obvious benefit is the potential for high investment returns. While multifamily properties are generally more expensive than single-family homes, they provide solid, strong returns — even during recessions in all but a handful of cases. Additionally, investing in multifamily properties early can help you take advantage of compounding returns. Over time, small amounts of money invested into multifamily properties can grow exponentially due to the power of compounding returns.
Some landlords have found that opting for lower-cost multifamily properties can help in many ways. First, the properties are often affordable, and they can house multiple renters, which means more income for you, which can be used to pay down the property faster. Multifamily affordable housing is considered to be a safe investment for investors. This is because these types of properties are often in high demand. In many locations, it is difficult for people to afford to buy single-family homes or even condos. Even renting single-family properties is sometimes out of the question. With affordable multifamily housing, though, investors can provide housing to those who need it, ensuring fewer vacancies.
What are the risks associated with investing in a multifamily rental property?
There are a few risks to consider when investing in a multifamily rental property. Firstly, construction costs have risen dramatically over the past few years, which can impact renovation work. Make sure you do your research and plan ahead with a strong budget before beginning apartment renovations to avoid any nasty surprises. Construction delays are also an unfortunate fact of life, so it may be best to take a very conservative approach in terms of your project timeline. Additionally, your renovation work may simply not be enough to get the investment outcome you’re looking for. You may invest a lot of capital to add the highest-end luxury amenities to a property built in the 1980s, but if potential renters are looking for a newer building, you may not see much of an uptick in occupancy or rental revenue.
Buying multifamily properties is significantly more expensive than buying single-family homes, therefore, it is usually hard to enter the market as a first-time real estate investor. While banks are usually eager to provide loans, buyers should be able to come with around a 20% downpayment, depending on the real estate market or the size of the property.
Finally, managing a property can be demanding. A significant amount of time, money, and energy, has to be spent on needs such as maintenance, rent collection, or tenant screening. Therefore it is usually best to hire a professional management company to make sure that your property is run by professional standards.
What types of financing are available for multifamily rental properties?
When an investor is looking at residential properties, they are likely going to be looking for conventional mortgage loans that are similar to what would be used for a single-family home. If you aren’t going to be living in the home and you are just using it for an investment, conventional loans tend to be the only option available to you.
However, if you are going to be living in one of the units on the property, it becomes “owner-occupied,” which provides some more options. In those cases, you might also be able to use VA loans or FHA loans since you are technically still living on the property.
The type of property being financed will also play a role in the financing options available. For example, luxury communities with high-end amenities may be more attractive to lenders and thus have more favorable loan terms.
In summary, the types of financing available for multifamily rental properties include conventional mortgage loans, VA loans, and FHA loans. The type of property and its amenities may also affect the loan terms available.
What are the tax implications of owning a multifamily rental property?
Investing in multifamily properties comes with several tax incentives. It’s possible to deduct operating expenses and maintenance costs, including management fees, insurance, and marketing costs, or any legal and professional services, such as property management companies. When it comes to capital gains taxes, knowledge is power. Capital gains taxes are paid whenever a taxpayer generates a profit from disposing of an asset like commercial real estate, bonds, or expensive collectibles. Capital gains taxes generally do not apply to ordinary personal and business income or the sale of an individual’s primary residence.
For more information on the tax implications of owning a multifamily rental property, please consult a tax professional.