What to consider before multifamily investing

So you’re ready to expand your investment portfolio. If you’re interested in investing in real estate, multifamily homes are a great way to get into investment properties. As with all investment opportunities, it’s important to consider the potential risks and rewards.

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. 

The Bottom Line

Why venture down the wrong road with your Real Estate investments … at SIMM Capital  We feel that Real Estate – Is the safest investment in the world. We live it and breath it – at SIMM Capital our investment strategy is to give everyone the chance to build wealth through real estate. We seek the best assets that hold the largest opportunities to improve on management and value, while delivering in rent growth year over year that will result in high quality returns. We know the business. To see how we can help you click – the link www.simminc.com



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