What to consider before multifamily investing

What is a multifamily property?

A multifamily property houses multiple families. Any residential property with more than one housing unit, each with its own kitchen and bathroom, is considered a multifamily property. This is in contrast to single-family homes, which are properties that house one family. Note that the term “family” has broad applications here, to also include couples and groups of roommates.?

The most common form of multifamily?investment property?is an apartment building or complex with multiple units. They can range anywhere from a two-family?duplex?to a high-rise apartment building with hundreds of units.?

Pros and cons of multifamily investing

As with any kind of investment, you must consider the potential benefits and risks that come with the asset type.?

6 Benefits of multifamily investment properties

When it comes to investing in real estate, multifamily properties come with considerable benefits.?

1. 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. While single-family homes have only one tenant or group of tenants, multifamily properties have multiple tenants paying rent. If there’s a vacancy in one unit, you’ll still likely have cash flow from other units. But before investing in multifamily properties, do your due diligence and come up with an investment strategy.?

Given the?fair market value?of your units, determine whether your rental income will exceed your?net operating costs (NOI),?which will include mortgage payments, insurance, taxes,?property management, and considerable?property maintenance. If the answer is yes, and your property is in a strong rental market where you’ll be able to fill vacancies quickly, you can expect a consistent cash flow.?

2. Easier to finance

The fair market value of multifamily homes will almost always be significantly higher than that of single-family homes in the same area, but when it comes to investment properties, it’s also easier to secure financing for multifamily properties. Multifamily properties aren’t as risky for banks because the cash flow for an apartment building is more predictable than that of 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 can turn over the unit. 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.

3. Scalable

If you’re looking to expand your investment portfolio, investing in multifamily real estate is a much faster way to grow than single-family rentals (which you would need to acquire one at a time). It also offers the opportunity to move toward commercial real estate investing as larger multifamily properties (those with five or more units) start to fall under commercial real estate,?with even greater cash flow opportunities.?

4. Tax benefits

Investing in multifamily real estate offers attractive tax benefits. You can deduct maintenance and operation costs, including utilities, property management fees, maintenance and repair expenses, insurance premiums, and any marketing costs.?

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.?

5. Passive income

Investing in real estate in strong real estate markets 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. This means you have more time to focus on your day job, or your next investment.?

6. Simplicity

Compared to commercial real estate investing, or managing multiple single-family rentals, investing in multifamily real estate is relatively straightforward. You’ll be able to purchase multiple units with a single loan (rather than a loan for each single-family home), and insurance companies familiar with multifamily properties will be able to create a policy for you.?

3 Risks of multifamily investment properties

While there are a lot of benefits to getting into multifamily property investment, there’s a reason not everybody can do it.?

1. Greater initial expense

As lucrative as a multifamily rental property might become, there’s no denying that the upfront cost is high. Even smaller apartment buildings (two to four units) will cost millions of dollars in?the most expensive cities?like 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 a roughly 20 percent down payment (give or take, 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.?

2. Competition?

Because multifamily properties do offer so many benefits for their investors, you’ll likely see interest from 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.?

3. More to manage

Even if you can swing a down payment and manage to beat out the competition to secure a multifamily property (both huge feats), your work is far from over. Managing multiple units is a huge responsibility that will require a lot of time, attention, and maintenance.?

If you’re a first-time investor, 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 a must.

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Property management for multifamily properties

The more units you own, the more important it is that you have help managing them. Unless you’re handy, can be on call for emergencies, know the ins and outs of your local rental laws, and are prepared to give your building and its residents a lot of attention, hiring a property management company is all but required.?

Property managers will essentially take care of all your day-to-day responsibilities. This will include collecting rent from tenants, turning over units, and addressing maintenance requests. While property management fees will cut into your profits a little, they’re typically very affordable at this level of property investment, and their fees are well worth their services.?

Multifamily real estate investing can be a lot of work and comes with a high bar of entry, they are often a lucrative asset for those who can afford the upfront costs. If you can swing it, start with smaller buildings and continue to diversify your portfolio from there.?

?Courtesy: Bungalow Team

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