Multi-Unit Investment Properties for Sale in Cambridge
When investors are considering getting into the world of real estate, Cambridge provides plenty of options to consider. Investment properties can vary in size, complexity, and responsibility, but the multi-unit residential property might provide the most intriguing path.
And, the multi-unit property is a great first stepping stone into the larger world of real estate investment.
Often referred to as a multi-family unit or multiplex, these properties can function for couples or singles just as well as they can for nuclear families. The multiplex is different from condominiums, apartment buildings, or complexes in that each unit must have separate entrances instead of one common building entrance.
In addition to its own entrance, each complete unit must have its own bathrooms, own kitchen, and own utility meter to track one tenant’s utility usage from other units.
They are denoted by the number of units sharing a single foundation and roof: a duplex containing two units, a triplex containing three, and so forth. In Canada, duplexes and triplexes are more common than fourplexes (also known as “quads”) or multi-unit properties with five or more units.
Multi-Unit properties are unique in that they provide the investor/owner with different options for how they want to operate their investment. While purchasing the property and renting out each unit to tenants is a straightforward method, it is also quite common for owners of multiplexes to live in one unit and rent the others to offset their cost of living directly from their investment.
Choosing either one of these options comes with its own set of challenges, but it directly affects one of the first steps of purchasing a multi-unit investment property: the down payment. A multi-unit property in which all suites are occupied by tenants is not deemed to be non-owner occupied, while one in which the owner would be living in a unit is considered owner-occupied.
This distinction has a direct impact on how much of a down payment an investor needs to make on the property. As of April 2010, investors in Canada are required by law to make a minimum down payment of twenty percent on investment properties that are non-owner occupied.
However, there is a big break on that minimum for those who choose the owner-occupied route and take up residence in one of their property’s units. The amount of the down payment difference varies by the number of units in the multiplex in question, but a duplex has a fifteen percent drop in the minimum, requiring only five percent down instead of twenty.
And those properties that have three to four units each only require ten percent instead of twenty. Of course, anything above that falls into the five-unit investment category and starts to operate under different rules.
There is also an addendum to these regulations as of February 2016. It denotes that the minimum down payment under the owner-occupied category shall be five percent of the purchase price if the property price exceeds $500,000. The down payment must also include an additional ten percent of however much the price exceeds the set $500,000 threshold.
Before that stage, an investor will have to be approved for a mortgage, either through a mortgage broker or directly through a bank. This will be affected by unit amount as well, as duplexes are typically the least challenging to find an approval for but the requirements and qualifications increase as unit numbers do.
Anything after the five-units-and-up commercial threshold also requires a commercial mortgage instead of a residential loan, with much-more business centric terminology and factors such as a coverage ratio, cap rate, or debt-to-income ratio. Like any loan, a mortgage lender will need a few things from the investor as part of the pre-approval and approval processes.
This would include things like proof of income, proof of a minimum down payment amount, appropriate documents from the municipality indicating residential or commercial property, and an agreement of purchase/bill of sale document.
Advantages of Multi-Unit Properties
It might sound backward, but it can often be easier to get mortgage approval for multi-unit residential properties than single-unit ones. Investors might even find lower interest rates on their loans when increasing the unit count on their potential property.
Lenders recognize that multiple units present flexibility when it comes to providing a steady flow of income, and are usually more reliable over a long timeline.
This is because a single-unit rental that becomes vacant suddenly provides zero monthly income, whereas a property with multiple units offsets the lost income of one unit becoming vacant.
Investors can still collect 50% of their monthly income if tenants move out of one unit in a duplex, or 75% of their monthly income if they have a fourplex and one unit is suddenly empty. Lenders recognize that this mitigates the risk of the investment loan not being repaid due to lost rental revenue.
The multi-unit process is also more efficient in the big picture, as opposed to the time and effort of finding several separate investment properties, acquiring separate loans for each, negotiating prices with the different sellers, having each one inspected, and then having several separate spread-out locations to deal with.
Disadvantages of Multi-Unit Properties
Multi-unit properties have a flip side to the coin, however. The math of adding everything up at once into one property is convenient but still costs more.
As opposed to building a portfolio one unit at a time and spreading out the investment expense of buying individual properties, the cost of multiple units is being paid at once and so it piles everything together into a larger price tag.
There are also increased unit numbers creating increased responsibilities for ownership. More units mean more maintenance, more upkeep, and of course more residing tenants that require communication and attention.
Even if investors are handy with a hammer or quick with bookkeeping, it can become overwhelming. Instead of having to replace one water heating system under one roof, for example, investors might have to do it at three or four different ones.
It’s therefore quite common to hire property managers or a maintenance company that can handle issues as they arise, alongside day-to-day operations. They will of course need to be paid too and can take a sizable cut of monthly profit margins.
While the multi-unit strategy for investors provides both positives and negatives and does differ from single-dwelling homes, the benefits to it are easy to see.
When considering investing in Cambridge real estate, consider a multi-unit residential property where the numbers add up in more ways than one.
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