Multi-Family Homes 101

Multi-family homes are a favorite of investors and a great way to have somebody else pay toward the equity you are building.

What’s A Multi-Family

In NJ, we consider two-family, three-family, and four-family houses to be residential multi-family homes. Five units and above are considered to be commercial properties.

How Do You Know It’s A Multi-Family

A multi-family property needs to be zoned and classified as such. Just because a home is in a multi-family zone does not automatically make it so. It is not uncommon to have a single-family house in a multi-family zone. If the owner wanted to convert it and legally rent it out as a two-family, they would need to go to the town and get a variance to do so. Additionally, there are times when the town has reclassified to a lower status. Most commonly is when a two-family is classified as a single-family, typically for tax purposes. However, it can also be a four-family reclassified as a three-family or two-family. This information will be discovered when the lawyer and/or title do their due diligence.

Impact on Mortgage

Multi-families are income-producing properties. Some homeowners prefer multi-families because the bank will give a higher loan for multi-families. Assuming a two-family property will be owner-occupied, the bank will take the current rent of the second unit as active income. If the second unit is empty, they will ask the buyer’s agent to send over comps and will use the projected rental income. However, if a unit has a tenant in place paying a rent that is below market, most banks will have to use the rental amount they are currently paying.

Investors

For most investors, multi-families are the way to go. Yes, a multi-family unit will rent out for slightly less than a single-family of equal size but the landlord can get multiple rents while only paying for a single closing, home insurance on one property, and landscaping for one house while diversifying their liability.