Published on Feb 15, 2025 5 min read

What You Need to Know Before Investing in a Two-family house

Are you thinking about buying a two-family house? If you want to invest in real estate and you're looking for extra rental income, a bigger living space, or a space where you can co-live with family but still have a little independence, it's a smart move. But buying a multifamily property isn't something to rush into. The opportunities and challenges of two-family homes are different than what you get with single-family properties.

Before you dive in, you need to understand the ins and outs so that your investment matches your goals and your budget. The eight most critical factors you need to consider before you sign on the dotted line for a two-family house are explained in this guide.

Top 8 Things to Consider Before Buying a Two-family House

Financial Viability: Can You Afford the Costs?

Investing in a two-family house can seem like a shortcut to financial gain, but it's important to be fully aware of all the costs involved. Start by evaluating your budget and the economic viability of a two-family property. Beyond the purchase price, there are ongoing expenses like maintenance, property taxes, and insurance. Multifamily properties also typically require higher down payments and interest rates than single-family homes, which could impact affordability. Understanding your mortgage options is essential here, as they can differ for multifamily investments. Consulting with a financial advisor can be beneficial in assessing both short-term expenses and long-term ROI.

Potential Rental Income and Occupancy Rate

One of the major attractions of a two-family house is the opportunity to generate rental income. However, dividing your mortgage by two is more complex than predicting rental earnings. You'll need to research the rental market in the area to gauge demand and determine a competitive rent rate. Consider the occupancy rate of similar properties in the neighborhood, as vacancies can affect your expected income. If you're relying on rent to help with mortgage payments, having a unit empty for an extended period could strain your finances. Factoring in vacancy costs and market fluctuations will help you set realistic expectations for your rental income.

Local Zoning Laws and Regulations

Zoning laws and building regulations vary widely from one city or county to the next, and they can significantly impact your plans for a two-family house. Only some residential areas allow two-family dwellings, and even in places that do; there are often specific guidelines on how you can use and modify the property. For example, some areas restrict short-term rentals, while others may require you to live in one unit if you're renting out the other. Check with local zoning authorities to make sure the property is compliant with existing regulations and that any changes you plan to make will avoid legal headaches.

Tenant Management and Responsibilities

Owning a two-family house means you'll likely become a landlord, which comes with its responsibilities and challenges. Managing tenants is more complex than collecting rent; it requires regular communication, handling maintenance requests, and being prepared to deal with potential issues like late payments or conflicts. Consider your level of comfort with managing tenants and handling the administrative tasks that come with it. Some owners choose to hire a property manager, which can ease the burden but also reduce profit margins. Assessing your ability and willingness to take on landlord duties is key to a successful experience with a two-family house.

Property Condition and Required Upgrades

When you buy a two-family house, the condition and any necessary upgrades should be carefully evaluated. Older multifamily homes might require more repairs or renovations to meet safety codes and ensure tenant satisfaction. Even newer properties can have hidden issues like faulty wiring, aging HVAC systems, or plumbing that isn't equipped for multiple families. Before purchasing, have a thorough inspection conducted by a trusted professional. Knowing the full scope of repairs and upgrades will help you budget accurately and avoid unexpected expenses after the purchase.

Neighborhood Dynamics and Appeal

The neighborhood in which the two-family house is located can significantly influence both the propertys value and its rental appeal. Look into factors like crime rates, school quality, accessibility to public transportation, and proximity to amenities such as grocery stores, parks, and entertainment options. Properties in safe, convenient neighborhoods with good schools often attract more stable, long-term tenants, which can provide a more reliable income stream. Talking to locals or checking community forums can also give you a sense of the areas culture, which is especially useful if you plan to live in one of the units yourself.

Potential for Future Appreciation

While rental income is a primary motivator, potential appreciation should be noticed. Evaluate the growth trends in the property's area by looking at recent sales data, future development plans, and the local economy's health. Areas on the rise with a high demand for rental properties are more likely to see property values increase, which can boost your return on investment if you decide to sell. Conversely, a stagnant or declining market may limit appreciation, making it harder to justify a high purchase price if you're relying on the property's value to grow over time.

Property Management Options

Managing a two-family house may sound manageable at first, but it can quickly become overwhelming, especially if you have other responsibilities. Some investors find that the time and effort required to manage even a small multifamily property is greater than they expected. Hiring a property management company can help alleviate some of this burden, handling everything from rent collection to repairs and tenant screenings. This convenience, however, comes at a cost, typically around 8-12% of rental income. Deciding whether to self-manage or hire a professional should be based on your lifestyle, budget, and willingness to take on property management tasks.

Conclusion

Buying a two-family house can be a fantastic investment, blending the benefits of homeownership with the potential for rental income. However, it has its challenges and complexities. By thoroughly considering factors like financial viability, tenant management, neighborhood appeal, and property condition, you'll be better equipped to make a sound, informed decision. Remember, real estate investments are most rewarding when they align with both your personal and financial goals.