The Pros and Cons of Multifamily Investing
Posted by Techyscouts | Posted on 03/31/2022
At Mike Millea, we’re happy to help those who are interested in expanding their real estate investment portfolio. Multi Family homes can be a great option for those who are looking to not only expand their portfolio but who are also looking to gain bigger rewards from their investments. But what goes into investing in multifamily homes? And is it a good choice for you? Learn more about the pros and cons of investing in multifamily homes.
What is Multifamily Investing?
A multifamily property includes houses of multiple families. Any residential property with more than one housing unit, each with its kitchen and bathroom, is considered a multifamily property. This can include not just housing families, but singles, couples, and groups of roommates. Multi Family homes are different from single-family homes, which are properties that house one family. The most common form of multifamily investment property is apartment buildings or complexes with multiple units. They can range anywhere from a two-family duplex to high-rise apartment buildings.
There are multiple benefits of investing in multifamily properties. This includes:
- Cash Flow- One of the biggest benefits of investing in multifamily real estate is the promise of a reliable monthly cash flow from rental income. Unlike single-family homes, multifamily properties will have multiple tenants paying rent. Even if there’s a vacancy in one unit, you’ll still have cash flow from other units. However, before investing in multifamily properties, do research and come up with an investment strategy. Determine whether your rental income will exceed your net operating costs (NOI), which will include mortgage payments, insurance, taxes, property management, and property maintenance. If the answer is yes, you can expect a consistent cash flow.
- Easier to Finance- While the fair market value of multifamily homes will be higher than single-family homes in the same area, it is easier to secure financing for multifamily properties. For banks, multifamily properties aren’t as risky because the cash flow for apartment buildings is more predictable than a single-family rental, so you might be able to shop for lower interest rates. For example, if you have four units and one tenant moves out unexpectedly, your rental income only drops 25 percent until you find a replacement. If the same happens in a single-family rental, you would not have any income during a vacancy which poses a greater risk to your lender. You’ll also be able to purchase multiple units with a single loan (rather than get a loan for each single-family home).
- Tax Benefits- Investing in multifamily real estate offers desirable tax benefits. You can deduct maintenance and operation costs, insurance premiums, and any marketing costs associated. In the long term, you can also take advantage of real estate depreciation and cost-segregation tax benefits as your building and its appliances age, even if the fair market value of the property is technically rising.
- Passive Income- Investing in real estate is a great way to earn passive income. If you hire a property management company to handle maintenance and communication with tenants, you’ll have little day-to-day work to do on your multifamily investment property.
- Scalable- If you’re looking to expand your investments, investing in multifamily real estate is a much faster way to grow your portfolio than investing in a single-family home (which you would need to acquire one at a time). It also offers the opportunity to move toward commercial real estate, which gives even greater cash flow opportunities.
While investing in multifamily homes comes with big rewards, there are some cons to be aware of. This includes:
- Greater Up-Front Expense- Investing in multifamily homes comes with high upfront costs. Even smaller apartment buildings (with 2-4 units) will cost millions of dollars in the most expensive cities, such as San Francisco or New York. And while banks are typically happy to provide a good interest rate to the right investor, you’ll still have to come up with roughly 20 percent of the down payment (depending on the real estate market and the size of the building). Because of this, investing in multifamily real estate is cost-prohibitive for many.
- Competition- Because multifamily properties offer many benefits for investors, you’ll likely be competing against experienced investors in a good rental market. When developers and property management companies compete over the same buildings or land, the prices will rise even higher. Some investors can even buy in cash, making it tough for newcomers to break into the market.
- Bigger to Manage- Managing multiple units is a huge responsibility that will require a lot of time, attention, and maintenance. If you’re a first-time investor and are managing more than a couple of units, or simply don’t have the time or expertise to take on landlord responsibilities, hiring a property management company to handle the day-to-day tasks is key to getting the help you need.
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