If you have reached that stage in life where you need to expand your investment portfolio and are thinking of making a real estate investment, you should consider purchasing a multi family home. Just like any other investment opportunity, you need to conduct due diligence to determine the risks and rewards and if you can accommodate them.
What Is a Multi Family Property?
A real estate property that houses several families is known as a multi family property. A residential property with more than one housing unit, each has its kitchen and bathroom, is referred to as a multi family property. It differs from a single-family home, a real estate property that houses only one family. “Family” is used in this context to include couples and a group of roommates.
Most multi family investment properties come in the form of apartment buildings or complexes with several units. They may vary from a two-family duplex to a high-rise apartment building with multiple units.
Some multi family real estate investors choose to reside in one of their multi family units. As a real estate investor, investing in multi family real estate is a sure way of generating wealth.
The Advantages of a Multi Family Property Investment
Before making a multi family investment, there are some benefits that you will get from making that decision, and they include the following.
Cash Flow
One reason most investors prefer multi family homes is the monthly cash flow it generates. Rents can be predicted, and where the market is strong, units can easily be turned over and rented again, ensuring constant cash flow all year round.
Passive Income
You can decide to be a passive investor when you invest in multi family real estate. This is because you can continue generating income without making any effort. You can hire a property manager to take care of all the responsibilities related to your investment. This is suitable for an individual investor with little or no experience owning and managing a rental property.
Valuation Potential
It is not wise to think that multi family property always appreciates. During the 2008-2009 housing market collapse, many investors lost most of their investments. However, multi family investors will realize that normally multi family property appreciates over time and can withstand economic downturns. Real estate values may not be steady, but these values tend to maintain their upward ascent with time.
Reduction of Risk
Multi family real estate is viewed as a safe investment compared to other real estate assets. That is true because people will still require a place to live, even during a bad economic downturn.
In fact, during these periods, most people find themselves in situations where they are forced to sell their homes and start renting. It takes time for people to rebuild their credit after a recession, which prolongs the demand for multi family homes.
Compare this to commercial real estate, where the demand usually decreases when the economy takes a hit.
Reduces the Number of Loans
One advantage of owning a multi family property is that it can be acquired by getting one bank loan if you don’t have the necessary finances. When you compare buying a 10-unit apartment complex to purchasing 10 single-family rental properties, you will realize that the former will require a single loan while the latter will require ten different loans. These loans will be cumbersome to track and manage after a while.
Other real estate investments will require several loan products with different maturity dates, which may confuse a first-time real estate investor.
Simplifies Insurance
Just like financing, the process of insuring a multi family property is also straightforward. As the number of units increases, insurance policies will be more complex, especially if you have amenities that may increase the owner’s liability, such as a rooftop terrace and outdoor pool.
As your multi family portfolio grows, it might be easy to have a single blanket cover for multiple units under one provider.
Scalability
Investors prefer multi family real estate because it allows them to scale one’s investment portfolio among this property class. The investor is free to grow their portfolio by any number of units at a time if they choose to. Since they have more requirements, it is difficult to scale your portfolio if you have invested in real estate properties like malls and hotels.
Tax Benefits
Multi family real estate has a lot of tax benefits. The majority of investors finance the acquisition of the property through a mortgage. The mortgage interest paid during that particular, fiscal year is tax deductible.
The mortgage interest in the first year tends to be higher as the loan starts to amortize. Multi family properties depreciate over 27.5 years, even if technically the property appreciates.
Depreciation is capable of offsetting a large portion of the rental income that is collected yearly, which makes it an attractive asset class for different types of investors.
Drawbacks of Multi Family Property Investments
Although there are a lot of benefits to getting into multi family real estate investment, there are reasons why this kind of investment may not be for everyone.
Management Intensity
Multi family property management is intensive, even if you have the option of outsourcing property management. When you own multi family property, you have to deal with different individual leased, tenants with various repair and maintenance requests, tenants with varying communication methods who pay their bills differently, and so on.
However, if you compare the management intensity of single-family rentals, managing a multi family property will appear a little bit easier. Depending on the property’s size, you can manage a multi-family asset efficiently by hiring an on-site or live-in property manager.
Cost
Depending on the location you have chosen to make your investment, the multi family property can be very expensive. This is why most investors cannot get into multi family investing.
Banks might be willing to offer an investor a good interest rate but still require the investor to come up with at least a 20% down payment.
For an average investor to come up with that cash may be difficult, especially if it is a bull market and many investors are competing for the same multi family property leading to an increase in prices. It might be less expensive to purchase a single-family home, but they also have property management issues.
Competition
Multi family property usually draws interest from investors with more experience. This eventually creates intense competition for multi family property shutting most new investors out of the market.
Experienced investors can raise cash to purchase and waive all purchase contingencies, making their prices more appealing to sellers even if they are lower. First-time investors partner with experienced investors to learn how to deal with the multi family product type.
Property Management for Multi Family Properties
You will need help managing your multi family property, especially if you have several units. You need to hire a property management company unless you are handy, can respond to emergencies, know your local rental laws, and are prepared to give all the attention required to the building and the tenants.
Property managers will be in charge of taking care of all the day-to-day activities of the multi family property. The activities include rent collection from tenants, turning over units, and taking care of maintenance requests. Although property management fees may slightly cut into your rental income, they are usually not expensive at that level of property investment, and the services offered are worth the fees.
Multi family real estate investing requires a lot of work, and the entry bar is very high. They can be lucrative assets if you can manage the initial costs. If you can afford it, you should commence with smaller units and continue upgrading and diversifying your portfolio.
What to Look for When Investing in a Multi Family Property
Here are a few things to look for when investing in multi family property.
Location
The location is crucial to real estate investors, especially if you are investing in multi family property. Each unit must be appealing to renters. You need to look for high-growth, high-yield areas with properties that are in high demand and make sure the neighborhoods are well-maintained.
The Total Number of Units
The number of units and the rooms in the units is very important to an investor. First-time investors should start their real estate search by focusing on three types of multi family properties: duplex, triplex, and fourplex. They offer the most upside with minimal risk and are more affordable.
Potential Income
The next step is estimating the total rental income you can get from the property. As a real estate investor, you must consider everything when verifying rental prices and income.
The Cost
Situations regarding financing real estate may differ, especially when dealing with multi family property. As an investor, you can live in one unit and rent out the other, which qualifies you for owner-occupied financing. That means the income from the second unit is factored into the lender’s qualifying ratio. You should also look at your credit score when contemplating financing options.
The Seller
It is critical to ask yourself who is selling the property. The property’s purchasing price will vary depending on who is selling it and their motivation. Bank-owned property is sold differently compared to for-sale-by-owner property. There is a possibility of saving on cost.
