You can transform a single-family home into a multifamily investment through a conversion where you split the home into multiple rental units. However, there are things to consider before deciding to start a conversion.
Taking a large single-family home and converting it into two to four different rental units has the potential to provide additional income, which is attractive to a lot of investors. There are several questions to ask yourself if you are deciding if a conversion is right for your home.1. What is the rental market?
Is there a market for rentals in your area? You wouldn’t want to put money into developing multiple units only to have vacancies and holding costs piling up.
The area of your town also impacts the rental market. Is the neighborhood mostly large single-family residences? If so, it might not be the best area for a multifamily rental.
2. What are the zoning and permit requirements?
Every municipality has different zoning laws and permitting policies for multifamily dwellings. Some areas do not allow single to multifamily home conversions. However, if an area is trying to promote more rental units in the area, they might be happy to give the necessary permissions.
3. Are your building plans feasible?
If you meet the zoning and permits and other conditions of your city, are the plans obtainable? Do you have a realistic budget for construction? Do you have a plan to cover holding costs if the building plans don’t go as planned?
You should also consider how you will find renters for the property. Do you have an advertising and marketing plan? Or will you hire a property management company to handle finding renters, getting leases, and managing the property?
4. Can the conversion be done safely?
Every city has different safety requirements for multifamily living units. You will need to check with your local municipality, but some of the requirements might include:
- Every residence needs a door leading to the outside of the home.
- Each unit needs its own sleeping area/bedroom, bathroom, and kitchen.
- Units might need their own utility meters.
- Fire codes will need to be met.
- The electrical grid of the home will need to handle the increase in the number of residents.
These are just a few of the safety requirements you might see, and it is important to be able to address them, or have a plan to make upgrades to the property.
5. What is the resale potential?
If you decide to sell, is there a market for multifamily properties in the area? If the area is heavily single-family homes, you might have a hard time selling the property in the future. However, if the rental market is growing, you might be able to find a buyer quickly.
With so many factors impacting the decision to convert a single-family property into multiple rental units, it is wise to meet with a real estate professional or advisor that can help you evaluate the possibilities.
Pros and Cons
There are both benefits and drawbacks to your finances and the community you live in when converting a single-family home into a multifamily investment.
Some benefits include:
- Might improve accessibility to affordable housing if it is lacking in your city.
- You might get more income tax deductions for owning an investment property.
- Because you will have multiple renters, you will still bring in rental income if the renter in one unit moves out.
- Rental income from multiple units has the potential to increase monthly cash flow.
Some drawbacks include:
- There could be higher property taxes once the property is converted.
- If the rental market slows, there is potential for vacancies.
- With more tenants there is likely to be more maintenance and repair costs involved with owning the property.
With so many possibilities for conversions, it is definitely something to look into as a real estate investor. The key is due diligence and making sure the choice is right for you personally, financially, and for the market.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.