Pros and Cons of Investing in Multifamily Properties
What do all real estate investments have in common? There are both risks and rewards involved and intertwined. If you plan on investing in multifamily properties, it is necessary to take all the aspects of the endeavor into account and choose your route.
What is considered a multifamily property?
Unlike a single-family home, multifamily properties contain at least one more separate residential unit. Moreover, each unit needs to include a bathroom, a kitchen, and a bedroom. As the property size goes, multifamily real estate can vary from a two-family duplex to a high-rise apartment building complex. This variety in properties on offer makes it all the more important to explore all the aspects of an investment process. It will help you find the investment bite of the right size, corresponding to your level of expertise.
All the (dis)advantages of investing in multifamily properties
Every investment starts with a plan, and every plan with thorough research. It serves to enlist all the possible strengths and weaknesses and allows for precise budgeting. After all, it is ROI that investors look for, so determining the risks is a top priority in the planning phase.
What do investors in multifamily real estate primarily benefit from? The most significant advantages of this type of investment include:
- A reliable cash flow from monthly rents
- Financing is easy to secure
- Attractive tax benefits
- Generation of passive income
- It is one of the safest investments
- Insurance cover is simple to arrange
On the other hand, investment in multifamily real estate presents a couple of disadvantages:
- Competition among investors is tough
- Higher initial expenses are expected
- Requires multiple unit management skills
If you’ve set your mind on property investment, especially rental real estate, first weigh the pros and cons.
Pro #1 A steady rental income
Where there are tenants, there are rents, and the more rental units, the more cash flow. Compared to single-family units, multifamily secure a steady influx of money, even if not all units are leased at all times. However, doing your homework before investing includes calculating your income to costs ratio. Your net operating costs must fall below your net rental income to benefit from this endeavor.
Pro #2 Easy financing and low-interest rates
Why are rental property loans so easy to obtain for multifamily real estate? Investing in multifamily properties doesn’t suggest a risky transaction to lenders due to the market predictability. If a tenant leaves your single-family rental property, you lose 100% rent. If a tenant leaves one unit in your multifamily rental, you lose just a percentage. For this reason, lenders might be inclined to suggest more convenient interest rates to prospective investors.
Pro #3 Attractive tax deductions
Probably the best part of every investment story is the tax benefits. When we speak about multifamily rental properties, these tax deductions include maintenance, repair, operation costs, utilities, property management fees, marketing expenses, and insurance premiums.
Pro #4 Generation of passive income
Hire a property manager, and your work on your property stops once you sign the deal. But that’s not all. The possibility to generate passive revenue allows you to free your schedule and focus on other ways to improve your rental business. In other words, focus on your tenants, reinvest a part of the income, and improve the amenities on offer. Owners of rental units with relatively small square footage add storage units to the deal. You can offer this option to residents to become more competitive in the market.
Pro #5 It is one of the safest investments
Even during crises, people need a place to call home. If purchasing a residence is not an alternative or the maintenance costs extend beyond the home budget, there are always rental options. And that fact precisely is what makes investing in multifamily properties one of the most secure financial endeavors. To remind you, when the economy slows, investing in commercial properties slows, too. And with the shift to remote work and home offices, investment in multifamily real estate can’t get safer.
Pro #6 Insurance cover is simple to arrange
By now, insurance companies have a clear picture of what a multifamily rental property requires, insurance-wise. They are also more than happy to offer affordable and tailor-made insurance coverage as they count on the low risk of such an investment. Designing a policy that envelops all the units in multifamily property and available amenities has become a standard.
What about the cons?
This might be the most critical part for the real estate investor on the rise.
Con #1 Competition among investors is tough
With so many apparent benefits to this endeavor, it would be a miracle if a plethora of investors hadn’t already clogged the market. But don’t despair. It only confirms that the investment is sound. After all, it takes grit to succeed in every business project, so why should investing in multifamily real estate be any different?
Con #2 Higher initial expenses are expected
With competition, especially competitors who buy investment properties in cash, higher initial expenses come. It is unavoidable. However, no one says you have to start big. Don’t stretch your budget beyond the reasonable limit. Soon enough, you’ll begin accumulating profit and get ready to move to more considerable challenges with the proper financial assistance.
Con #3 Requires multiple unit management skills
Just because you’re a savvy investor doesn’t mean you have to be a property manager. However, the burden falls on you until you find someone competent enough to run your rental business. And the more units you have, the more tenants you have to deal with, which requires excellent people skills. Not to mention maintenance and administrative work that require attention to detail and a lot of time.
A couple of last notes
Compelling benefits to investing in multifamily properties make it an excellent source of passive income with little risk but a lot of (healthy) competition. It also doesn’t surprise that investors rely on tailored loans only to be the first to grab the promising property investment opportunity. Weigh the pros and cons before you rush into things, and you will be just fine.
Meta description: If you plan on investing in multifamily properties, it is necessary to take all the aspects of the endeavor into account and make a choice.
Adam Smith has spent the last 5 years in the Private Money Lending world helping real estate investors secure financing for their non-owner occupied real estate investments. When he’s not thinking about real estate, Adam is an avid Jazz music fan and fisherman.