Real estate proves to be an excellent alternative for investors seeking to avoid the instability of the stock market. It’s also helpful for persons looking for a viable long-term opportunity to grow their capital actively or passively. Besides, one of the exciting things about the housing market is that different strategies could prove successful.
Multifamily real estate investing is one of the helpful business strategies that have earned real estate investors enormous wealth and consistent case flow over the years. Here, you’ll find essential information regarding multifamily real estate investing, including its benefits and downsides of it. At the end of this page, you’d have enough knowledge in this field of multifamily real estate investing to guide your future investment plans.
Investing in Multifamily Home
There are two different rental investing options for residential real estate investors seeking a second stream of monthly income plus steady capital growth. They include single-family and multifamily investing options.
Single-family homes are residential structures with one available unit for rent per time. On the other hand, multifamily properties have more than one rentable space for rent, lease, or sale per time. Also known as apartment complexes, multifamily properties include duplexes, townhomes, and condominiums.
Although investing in single-family properties has lower barriers to entry, there are several exclusive benefits of multifamily investing. Here’s a rundown of some benefits of investing in multifamily homes.
Predictable, Passive Cash Flow
One of the reasons investors prefer multifamily homes is the monthly cash flow. Rents in the average multifamily housing market are predictable. Moreover, property owners can readily turn over units and re-lease them to gain constant cash flow year-in-year-out.
Multifamily properties also offer an intensive potential of providing extra income for investors while they engage in other activities. Investors can readily employ a property manager to execute the daily responsibilities on their behalf. Besides, this makes investing in multifamily properties inviting to investors with minimal experience in the housing market.
Compared to other asset classes, multifamily homes often come under the classification of “relatively safe” investments. Why? It’s not only because people always need a place to live even in the harshest of economic times.
Also, home sales are usually high during harsh economic times, with people preferring to stay in rental apartments. Multifamily properties, therefore, would have a higher demand compared to office properties or commercial outlets, for instance, at all times.
Fewer Loans on Multiple Housing Units
Another advantage of multifamily real estate investing is that potential investors can readily purchase them with a singular straightforward bank mortgage. Think about how many mortgages it’d take to purchase twenty different single-family properties, compared to a 20-unit condominium.
While the single-family investments would require twenty separate loans, the latter would need only one loan. Meanwhile, loans could be very tasking to track and manage with time. Besides, other real estate asset types require multiple credit facilities that mature at separate times and could confuse a novice investor.
Numerous Tax Perks
Investors who put up multifamily real estate for lease or rent enjoy numerous tax benefits on their income. Most investors utilize a mortgage in financing their property. Consequently, they can make deductions for mortgage interest payments made every year until they complete their mortgage.
Moreover, multifamily properties can also enjoy tax benefits over “depreciation” for twenty-seven and half years. Depreciation can help offset a sizable portion of the annual rental income, regardless of whether the property technically appreciates. These tax benefits altogether make investing in multifamily homes more appealing to new and experienced property investors.
Diverse Product Categories
Several multifamily product options are available for investors yet we consider multifamily properties a single asset class. For instance, investors can invest in small duplexes or triplexes.
You may also choose newly-renovated properties or go for value-add apartments in a residential area. Other possible product options include an off-campus student apartment complex or retirement settlements focused on seniors.
The best part? Even without having millions of dollars to your bank account, you can still enjoy multifamily real estate investing with Holdfolio‘s affordable offers.
The Cons of Investing in Multifamily Homes
Multifamily real estate investing has many benefits for all types of investors. But it has its downsides too. Below are some of its major disadvantages.
- Intensive Management Requirements
While you could always outsource property management of multifamily homes, it doesn’t take away that they require intensive management. Investing in a multifamily property involves dealing with several individual leases and tenants with separate maintenance and repair needs.
The manager also has to deal with tenants who have different preferences concerning paying bills or communications. This situation is obviously in sharp contrast to leasing a 15,000 square feet office complex to a single tenant.
The manager would only have to manage a single occupant. Besides, the tenant is often responsible for most property management operations if it’s a commercial lease.
Competition for multifamily homes, especially in vibrant markets, can be very intense. Interests from more expert investors could technically shut many relatively inexperienced investors out of the market.
For instance, experienced investors don’t only have high-profile negotiating skills and track record on their side. They often also have enough cash to throw around and waive all purchase contingencies, making them more convincing to potential sellers.
Depending on your chosen location, multifamily properties could be quite expensive. It’s often one of the biggest reasons investors stay away from this type of investment. Imagine having to invest in a three-unit apartment that cost $1.5 million. Most banks would request a down payment of at least 20 percent of the mortgage, meaning $300,000.
Putting up that amount of cash isn’t a piece of cake for the average investor. Moreover, intensive competition as highlighted above from several investors could drive the prices of the same property higher every passing moment.
Are multifamily homes a good investment? The answer to that often lies with the investor. Multifamily investing needs a significant amount of time and effort to operate, as when investing in most other real estate sectors. If managed properly, they can provide an excellent source of passive income to all classes of investors.
In any case, it’s vital to have a basic knowledge of any asset class where you intend to invest. That’s the main reason we’ve put together the pros and cons of multifamily investing here to inform subsequent decisions on this excellent property investment opportunity.