There are few things in life that are more exciting than buying your first home. In all the excitement, however, starry-eyed first-time buyers often miss this simple fact: buying your first home is a critical moment in your financial journey. In this post, I’m going to help you think strategically about how to make the most of that moment. How? By focusing specifically on residential multifamily property. In fact, I’d argue that making your first home a multifamily could be one of the wisest investment decisions you ever make. Here are 6 reasons why I can say that:
1. Jump Start Wealth Building
Homeownership is the most powerful driver of wealth accumulation in the U.S. economy. In 2022, the average net worth of a homeowner was just under $255,000. For a renter, that number was barely above $6,300.
The average homeowner usually focuses more on putting a roof over her head than building wealth. I’d argue that’s a shortsighted way to look at purchasing your first home. Indeed, your first house is an investment property, whether you realize it or not.
So, why not think like an investor and maximize the opportunity before you? By choosing to purchase a multifamily property as your first home, you’ll ensure that the very first property to hit your portfolio is a solid earner that will last you a lifetime.
2. Ride with Training Wheels
What I’ve said so far requires you to think and act like a real estate investor. That can be a daunting task, especially if you’re standing on the outside listening to stories of investors who consistently deal in 200+ unit complexes.
This may come as a surprise, but the mechanics of purchasing a duplex aren’t all that different from that of an apartment complex. They only come in a smaller scale.
So, by starting early on with a smaller residential multifamily, you can begin to develop the fundamental skills you’ll need to move on to bigger properties in the future.
It’s never too soon to get into real estate investment—even when you’re looking for your first house.
3. Have Other People Pay Your Bills
Imagine you’re purchasing your first place and you’ve got the means to secure a $250,000 loan. So, you throw 3.5% down on a 30-year FHA loan at 3.75% interest. That makes your monthly mortgage payment (without taxes and insurance) $1,306 a month. Since you’ve bought a single-family, that entire mortgage load rests on your shoulders.
Now, imagine you decided to go with a similarly priced duplex instead. For the sake of this scenario, let’s say rental rates in your market are sitting at around $800/mo for a 2-bedroom. So, you buy the property, live in one unit while renting out the other. Just like that, you’ve reduced your monthly mortgage load to $506.
Take it a step further and imagine you purchased a triplex instead. At this point, your mortgage is more than covered. Now, you’ve got the option to dump that money into your equity, make improvements to the property, or cover your other bills.
4. Economy of Scale
You’ll notice that in each of those scenarios I envisioned above, you only had to purchase one property. That means only one negotiation, one loan, and one contract-to-close process. It also means one physical property to keep your eye on rather than 2, 3, or 4 scattered around the neighborhood.
Therein lies the beauty of multifamily real estate; you reap the benefits of having four separate income properties with only a quarter of the hassle.
More importantly, your acquisition costs per unit drop as you purchase higher-capacity multifamily properties. Not only will that help you to secure financing, but it’ll improve your cash-on-cash returns.
5. Easier Financing
Thanks to programs like FHA, financing can be much easier to obtain for a du-, tri-, or quadplex than for a commcerical multifamily property. The terms will generally be more favorable as well. On top of that, one of the most common funding hiccups for new multifamily investors is their lack of experience. Without a proven track record, lenders are less likely to make a commercial multifamily loan. This locks new investors into a bit of a catch-22. You need the experience to get the property, but you need to the property in order to get the experience. But, if you use FHA to purchase a multifamily property as a first-time buyer, you can easily kill both of those birds with one stone—all while locking in a relatively low monthly debt load.
6. On the Job Training
Managing an investment property is not for the faint of heart. Keeping up a successful income-producing property takes both business acumen and emotional intelligence.
That said, no one is born with an innate set of property management skills. Everyone has to cut their teeth somewhere. What better way to do so than on your home turf?
As the on-site manager for your own property, you’ll have a firsthand view of everything that goes on with the building, your tenants, and the neighborhood. With everything in arm’s reach, you’ll be able to monitor and manage your property far better than you could if it were located halfway across town.
Learning to landlord is one of the most important things you can do early on in your investment career. One day, you’ll hire other people to manage your properties. Having built up this skillset, however, you’ll know exactly what to look for in a new hire.
If you’ve read any of my other stuff, then you know just how much I believe in multifamily investment as the way to build up life-changing wealth. That’s especially true when you’re first getting started out in real estate.
That said, it’s never too soon to get into real estate investment—even when you’re looking for your first house.
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