Investing in a multi-family complex certainly looks lucrative. The Pensacola News Journal reports that returns of 7 to 8 percent from rental properties "are not uncommon." If you're considering buying a multifamily home to live in one of the units and rent the rest out, there are some important pros and cons to consider.
Just because renting a multifamily home you own seems like an attractive option in a tight rental market, there are a number of drawbacks to consider. Unexpected costs may be one of your biggest obstacles to making money from a rental property, says Bankrate.com's Margarette Burnette. In a report for MSN Real Estate, Burnette lists four hidden costs of being a landlord: Increased insurance costs, additional legal and administrative fees, expenses for cleaning, care and maintenance of a rental property, and increased taxes.
If you're thinking about buying a rental property, you can expect to pay as much as 25 percent more on your insurance premium. And in order to negotiate the web of new laws you'll be subject to as a landlord, you'd be wise to hire a lawyer who could cost hundreds of dollars an hour to advise you. That's on top of any legal costs you might incur if you have to evict a tenant or face off in court against an aggrieved renter. Meanwhile, some municipalities have special fees they charge landlords. And don't forget: if you're a landlord you're also in business. That means you're going to have to spend money to make your property presentable to new tenants, keep it in good, livable shape, and clean and fix any damage after tenants move out. Security and cleaning deposits won't pay for all these expenses. Your costs are also going to vary depending on what state your rental property is in. Each state will have different taxes it charges landlords. Before you decide to buy a multifamily complex to rent out, make sure you know what those taxes are.
Meanwhile, you also have to consider other drawbacks. How will you feel about living in the same building as a tenant? What will you do if you can't rent a unit? Each month you're unable to rent a space out is a month without rental income, but your expenses for the property will remain the same.
But though there are added costs to owning a multifamily complex and renting it out to tenants, there are also important positives. If you buy a house with multiple units and plan to live in one of them, you can get tenants to pay your mortgage costs, or at least subsidize some of them. That could help you pay your mortgage off faster. Then once your mortgage is paid off you can profit from the monthly rent you receive. You'll be able to pocket some of those profits. Plus the more units you have, the more cash flow you'll have coming in. You also won't have to compete with all the single-family homeowners diving into the real estate market. Finally, once you're ready to sell, you could stand to make much more money selling your multifamily building, especially if you've paid it off.
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