Real estate investors can choose from many types of properties. Homes, commercial buildings, and land are some of the many options. Investors aim for cash flow or appreciation, and a multifamily real estate investment can provide both. These in-demand properties have many financial advantages over single-family homes and other real estate assets. This complete multifamily real estate guide will cover the perks and everything you need to know.
What Does Multifamily Mean In Real Estate?
A multifamily real estate property has multiple units. Duplexes and apartment complexes are both multifamily properties. Duplexes only provide two units, while some apartments have over 100 units. You can rent out each unit and collect consistent cash flow.
Some investors use house hacking to build equity and put a roof over their heads. They live in one unit and rent the other units to tenants. Living in your multifamily property is a great way to lower your cost of living.
What Are Multifamily Real Estate Investments?
Multifamily real estate investments range from duplexes to apartment complexes. Any property with multiple housing units is a multifamily property. A housing unit must have its own kitchen and bathroom. We cover some multifamily real estate investments below:
- Duplex — a property with two floors. One person lives under the other.
- Townhome — a wall inside the housing structure separates tenants. Semi-detached homes are similar to townhomes.
- Apartment — a property with five or more tenants that share the apartment’s resources (i.e., gym, pool, etc.)
How Do They Work?
Multifamily properties require more financing than single-family homes. Investors can dabble with 2-4 unit multifamily properties to get started with less risk. Some multifamily properties come with tenants inside. You can keep these tenants and collect cash flow or not renew the lease after it expires. If a multifamily property has tenants, you must consider their payment history and current rent prices when making an offer.
Investors find tenants for the property’s units and collect monthly rent. Rent payments should surpass costs or at least break even. Investors can raise the rent in the future to expand their profits. While this happens, the property can appreciate over time, resulting in higher returns.
Multifamily vs. Single-family Investing
Multifamily and single-family investing both provide residential real estate. Both real estate assets have their quirks which we analyze below.
Price
Single-family properties cost less than multifamily properties. That’s understandable since single-family properties give you a single unit while multifamily properties give you several. Multifamily properties price many people out of the market, especially in high-demand locations. Some investors start with several single-family properties before committing to a multifamily investment. These investors may sell several single-family homes to raise enough funds for a multifamily property.
Mortgage
You’ll have to put more money down for a multifamily property, especially if you’re new to real estate. Most lenders will expect a 20% down payment for these investments. While many people make 20% down payments for single-family properties, you can get single-family homes for far less. Some home buyers with high credit can get a single-family home for as little as 3% down. Higher listing prices and higher down payments make multifamily investing harder to access than single-family homes.
Risk
Single-family investments let you spread your holdings across multiple locations. As a result, you can spread your portfolio and reduce your risk. Multifamily homes are also more difficult to sell than single-family homes. This problem can become significant if you have a sudden need for funds.
Scalability
Multifamily homes shine in scalability. After you get through the beginner hurdles, multifamily real estate investing can help you generate wealth at a faster pace. Property management only has to visit one property instead of your scattered single-family homes.
Things To Consider Before Investing In Multifamily Real Estate
- Location: The location determines rent prices, price hikes over time, and your ability to find tenants. It’s the most important component of real estate.
- Cap Rate: The cap rate tells you the expected rate of return for a multifamily property. Divide net operating income by the property’s value to determine the cap rate. This rate helps you compare multifamily investment opportunities, but you shouldn’t use the cap rate alone for investing decisions.
- Potential Cash Flow/Rental Income: Set realistic expectations for how much you can earn from the multifamily property. Look at changes in rent and average turnover rates in the location.
- Number Of Units: More units let you house more tenants and higher prices. Find the right balance between your budget and desired number of units.
- The Property’s Seller: Why is the owner selling? It’s okay if someone wants to retire or pursue a more ambitious project. However, some people sell to get out of a sinking ship. Check the seller’s history to see how they care for tenants and their properties. You don’t want to inherit numerous property and legal issues.
- The Costs: The mortgage, repairs, and other expenses will decrease your profits. Assess all costs to ensure you don’t get stuck with a negative cash flow property.
Pros of Investing In Multi-Family Real Estate
- Bigger/More Steady Cash Flow: Having more units increases your cash flow potential.
- Passive Income: You can hire a property manager to take care of tenants, making multifamily property cash flow feel more passive. You’ll receive rent payments every month which can further fuel your real estate empire.
- More Control Over Value: You can make repairs and home improvements to increase the value of your multifamily property.
- Multiply Income With Only Incremental Added Cost
- Larger Pool Of Tenants: You can accept more tenants who seem like great fits. Single-family investors have to deny great tenants because they can only select one for the property.
- More Tax Benefits: Multifamily real estate comes with many write-offs such as interest payments, repairs, depreciation, and other expenses.
- Quicker Compound Returns: Multifamily real estate properties provide more cash flow. These returns will compound over time, helping you realize larger profits from multifamily real estate investments.
- Benefits From Economies Of Scale: Multifamily real estate reduces property management costs. Even though you have several units, they are all in the same location. Scattered single-family homes are more challenging to scale.
- Simpler Than Commercial Real Estate Investing: Commercial real estate investing involves more upfront capital, time, and research. Multifamily properties offer a more straightforward path to real estate investing than commercial properties.
- Blanket Insurance Policies: Some insurers specialize in multifamily properties. A single insurer can cover all of your multifamily units. Each single-family home will need separate insurance policies, adding extra complication to your real estate portfolio. Multifamily real estate escapes this issue.
Cons of Investing In Multi-Family Real Estate
Investing in multifamily properties isn’t perfect. These disadvantages can cause hiccups early in the journey. These disadvantages will become less prevalent as you grow your real estate portfolio.
Greater Initial Expense
Multifamily real estate costs more than single-family homes and has higher down payment requirements. These higher costs can deter beginners and present a steep barrier to entry. Some investors buy several single-family homes before investing in a multifamily property.
More to Manage
Multifamily properties have more units than single-family homes. Multifamily real estate is more to manage, but it has greater cash flow potential. If your multifamily property takes too much time, you can hire a property manager to assist tenants.
Responsibility For All Repairs
When you buy a property, you become responsible for the repairs. A landlord won’t bail you out since you own the property. You’ll have to assess any damages and determine optimal repairs. You can hire a specialist to make these decisions, but these costs will come out of your pocket.
Competition
It’s harder to find multifamily properties on the market than single-family homes. Investors may enter bidding wars to obtain one of your area’s few available multifamily properties. A low supply of multifamily homes makes any competition feel more excessive. You may not only compete with people in your local area. Some remote investors and companies scoop up multifamily properties across the country.
Is There An Easy Way To Invest In Multifamily Real Estate?
Multifamily real estate investing is one of the best ways to build wealth and generate cash flow. The glaring issue with this asset is the barrier to entry. High costs and stiff competition can paint a bleak picture for new investors. Luckily, there is an easier way to invest in multifamily real estate.
