Pros and Cons of Investing in Multifamily Real Estate in 2023
Pros of Multifamily Properties in 2023
Let’s start by looking at some of the positives of owning multifamily real estate properties in 2023:
1. Hedge Against Inflation
Many experts continue to foresee a looming recession in 2023. The coming one could be a bit more severe than the brief one we saw in 2020 when COVID-19 almost brought the global economy to its knees.
According to AI and machine learning algorithms, you can expect the recession to occur by October 2023. How is it an advantage for multifamily real estate property investors?
Firstly, many lenders and financial services providers are reluctant to offer loans and mortgages during a recession. It delays new real estate developments. Remember, the population is still growing, so the demand for housing grows yet it’s not met.
Renters are compelled to continue renting properties as they’re priced out of owning real estate by the high home prices and interest rates. As such, multifamily property occupancy rates tend to remain strong during difficult economic times.
Secondly, multifamily properties offer investors an opportunity to adjust their rental rates as frequently as every 12 months to match the market condition. Multifamily properties offer you the flexibility to reset your pricing to cover rising operation costs and meet demand.
2. Steady Cash Flow
Keeping multiple tenants on your multifamily real estate property stabilizes your monthly cash flow. It is mainly because you lower the chances of experiencing vacancies on your rental property.
If some of your units stay vacant for a while as you keep looking for tenants, you can still continue earning monthly rental income from the occupied units.
For example, if you own a quadruplex and one tenant moves out unexpectedly, your monthly cash flow only drops by 25%. If the same thing happens in a single-family unit, you lose 100% of your monthly income.
You’re also likely to get tenants who are looking for multi-year leases. Such leases will help you shorten the gap between vacancies.
However, there’s also a potential downside to it. Multiple tenants can also cause extensive damage to your multifamily property. Since the utilities are used frequently, they might break down faster. You’ll need to replace them or get them maintained frequently.
3. Easier to Finance
The?fair market value?for multifamily real estate is always significantly higher than that of single-family homes. However, it is an advantage when it comes to securing financing.
Many financial services providers are aware of the benefits of multifamily real estate investments. They recognize the multiple tenants and steady rental income you can attract with multifamily properties.
Multifamily real estate properties are less risky for banks and other financial providers since the cash flow means that you’ll afford the monthly loan payments.
As such, investors are able to access diverse financing options with favorable interest rates. In addition, you can even purchase multiple multifamily properties all under one loan.
If you want to access favorable lending terms and requirements, it’s better that you find a lending service that specializes in commercial real estate.
4. Easy to Insure
Investors can choose among a wide range of insurance premiums when getting insurance coverage for their multifamily real estate properties.
Just like financial services providers, insurance providers are also familiar with multifamily properties. They offer diverse policies to cater to both residential and commercial multifamily real estate.
The best thing about it is that if you’re investing in multiple multifamily properties, most agencies will allow you to include all your investments in a single insurance policy. However, you should expect to pay a large insurance premium if you’re investing in a large apartment building or condo complex.
5. Highly Scalable
As an investor, you’re most likely looking to scale and own multiple real estate properties. Multifamily properties are a faster way to scale than single-family properties.
With the latter, you’ll need to acquire one real estate property at a time. Keep in mind that the time taken to get financing and repay your debt can also lengthen the time you take to invest.
Multifamily properties are also an excellent entry point into?commercial real estate. It is due to the fact that multifamily properties with five or more rental units are considered commercial real estate. You can also benefit from the value additions, such as fitness centers, laundry services, and dog parks.
6. Unique Tax Benefits
Multifamily rental properties offer investors sweet?tax benefits. You can benefit from?tax deductions,?such as:
§?Management
§?Maintenance
§?Marketing fees
§?Repair costs
§?Insurance
§?Utility bills
Any costs that are associated with getting new tenants and ensuring your multifamily investment property stays in top shape can be written off as marketing and maintenance costs.
In the long term, you can also benefit from real estate depreciation and cost segregation tax advantages as your real estate property and appliances continue to age. It can happen despite the fact that the fair market value of your property could be rising.
Keep in mind that the said tax benefits attract many real estate investors, therefore making the multifamily property market extremely competitive.
7. Potential Passive Income
If you don’t want to be involved in the management tasks that come with owning rental property, multifamily properties give you a great opportunity to invest passively.
You can hire a property management agency to find tenants, handle rent payments, schedule maintenance and repairs, and basically handle everything. It will leave you with very little to do when it comes to the day-to-day running of the multifamily property.
Passive investments give you the flexibility to focus on your day job or find the next real estate investment.
Courtesy: by?Kabue Muriithi?