Is multifamily real estate a wise investment?
The lure of multifamily properties is you get access to more family units than a single-family home. But there are pitfalls and risks; it’s not something you should rush. If you’re new to multifamily units, you may not know exactly what they entail.
That’s where we come in! Keep reading for the pros and cons of multifamily real estate you need to consider.
When you’re looking at real estate investment opportunities, consider multifamily. There is no denying the benefits they bring, so let’s break them down in more detail below.
One of the biggest reasons to invest in multifamily real estate is the potential for cash flow. There is the chance for reliable monthly income via renting each unit out.
Single-family homes only provide one rental income. But here, you have a few different families paying rent. Even if one unit is vacant for a period, it’s likely the other ones are still generating cash.
Before you jump in, though, make sure you’ve done your homework. You’ll need a solid investment strategy, especially if you need financing. Using the fair market value of the units, work out the rental income for each one.
Is this going to amount to more than the net operating costs (NOI)? These costs should include:
- Mortgage/loan payments
- Property management fees
If the answer is yes, check out the area next. Are similar properties getting snatched up by renters or sitting empty. You need to make sure your units won’t sit empty and will start generating income as soon as possible. The best multifamily real estate properties don’t sit empty for long.
Easier Financing Options
The fair market value for these homes will always come in higher than a single-family property. This isn’t as much of a hurdle as you might think, though, as it’s easier to finance multifamily investments.
These apartment blocks aren’t as big a risk to banks when compared to a single-family homes. This is because it’s easier to predict the rental income they’ll generate, and it’s seen as steadier.
Say you have 4 rental units, and one tenant moves out. You’re only losing 25% of the income until you get new tenants in. With a single-family home, 100% of that income goes down the drain.
As we’ve mentioned, it would be highly unfortunate for you to lose every single tenant in a block at the same time. Because of this, you may be able to shop around and get better interest rates.
Possibility to Scale Up
When you want to expand your portfolio, it’s a lot slower with single-family homes. You need to go through the buying process for each one. With multi-units, you’re getting many properties in one deal.
It also opens up the chance to expand into commercial real estate too. These multi-units (if they have 5+ properties) will call under commercial use. This can open the possibility of even more cash flow. It’s always a good bet to have diversity in your portfolio.
Tax Incentives and Benefits
There are very attractive tax benefits to owning these types of property. You can deduct from your tax bill things like:
- Operating costs
- Property management fees
- Marketing costs
Over the long term, you can make use of real estate depreciation too. There is also cost segregation as the building and fixtures age. This counts even if the fair market value for the property is going up.
Income is Passive
If you’re looking for passive income, then investing in real estate is one of the best ways to do it. If you go with a property management agent, they’ll handle running the properties.
All that day-to-day work you won’t have to worry about. This means you can focus on your job, your family, and working out where your next investment will be.
Multifamily real estate investing is simple compared to commercial real estate. It’s even simpler than managing many different single-family properties too.
For example, you’ll have many different family units under one loan. That’s better than trying to juggle man different loan agreements for each property.
Insurance will be much the same too. Instead of having a policy for each home, you can have a policy that covers all units. It’s a great way to reduce admin and make your finances easier to keep track of.
While the benefits speak for themselves, there are a few negatives to consider too. Multifamily real estate investing isn’t for everyone, and not everyone can even do it. Here are some cons you should bear in mind.
Initial Cost is Higher
While the possible income is lucrative, the initial cost will be higher. Even small blocks (2-4 units) in some desirable cities cost millions of dollars. If you’re looking to invest in large cities like New York or San Francisco, prepare to pay top dollar.
Even if the banks will give good rates and will loan out to the right investor, they don’t cover it all. You’ll still need to put up about 20% in a downpayment. Because of this, a lot of people can’t afford to get into the multi-unit game.
Because of the benefits they offer, you should expect to see a lot of interest from other investors. Especially those with experience and large portfolios under their belts.
When more people are competing over the same block, you’ll see the prices soar even higher. Some investors, if they’re big enough, can even buy with cash. This means it’s a hard market to break into.
More Properties to Manage
Even if you have the money and you beat out the competition, the work isn’t over. You’ve now got the challenge of managing all these units at one time. This is going to take a lot of maintenance, work, and time.
If you’re new to investing, have more than 2-4 units, or don’t have the time, then call in help. There is no shame in taking on a property manager to run the day-to-day operations at these units.
Multifamily Real Estate Could Be the Best Investment You Make
Multifamily real estate poses challenges at entry, but if you can overcome that, it’ll pay. With large, more stable cash flow amounts, tax benefits, and better financing, what’s not to love? Just do your homework, run the numbers, and don’t jump right in at the deep end.
If you’re looking for investment properties, contact us today. At Memphis Investment Properties, we provide cash-flowing turnkey properties to get going right away.