Nearly 31% of all housing available in the United States today consists of multifamily units, making multifamily real estate investing a valuable part of your portfolio. If you’ve yet to add these kinds of properties, though, you may want a quick introduction to how the market works.
What is Multifamily Real Estate?
Multifamily properties are those that have multiple families living inside. In fact, any residential property that contains more than one housing unit is considered to be a multifamily property. Apartment high-rises in the city count under this category, as do smaller apartment complexes in the suburbs. Similarly, two-family duplexes fit into this label. So it’s a wide range.
Why Consider Multifamily Real Estate Investing?
One of the biggest benefits of investing in this type of property is the sheer number of opportunities that exist in the market today. There are hundreds of these properties across the United States looking for investors now, so once you decide to enter the market, you’ll have lots of options at your feet.
This kind of investment is also typically fairly easy to finance. The fair market value of a multifamily home is typically quite a bit higher than that of single-family homes, which makes it easy to find the financing you need. Multifamily homes just aren’t that risky for banks as the cash flow tends to be fairly predictable. That may mean you have lower overall interest rates than you might with a single-family home investment.
Multifamily investments also tend to make your portfolio far more scalable. They’re a fast way to grow, and you could quickly find yourself investing in larger properties that push you into the commercial market and spell bigger cash flow opportunities.
As with most real estate investments, multifamily real estate investing means some attractive tax benefits. Maintenance and operation costs (even property management fees) can all be deducted from your taxes. Overall, you’ll have the opportunity to take advantage of real estate depreciation and cost-segregation tax benefits, too, as the property ages even if its value is increasing on the market.
More than anything else, though, it’s a simple opportunity that means great cash flow, particularly if you hire a property management company to deal with maintenance and communication with tenants. Investing in a single-family home means a single stream of income each month. In a multifamily property, though, you’ll be able to collect the rent from a number of tenants each month, so even if you have a vacancy, you can still at least count on the cash flow from other units.
The Risks
There are a few risks involved with this kind of property. Your initial expenses will be quite a bit greater than they might be with a single-family home. Typically you can expect to spend a few million dollars on this kind of property, and you’ll be expected to have at least a 20% downpayment on hand to cover the financing.
You may also come across fairly stiff competition in this market. Many experienced investors already look for these kinds of properties, so you may end up in a bidding war when you think you’ve found the right property.
Finding the Ideal Property
The process of multifamily real estate investing starts with finding the right property. Look for one that is located in a high-growth, high-yield area. You want well-maintained neighborhoods and single-family homes along with easy access to lots of amenities. You’ll also want to consider the total number of units and the number of rooms in each unit. Duplex, triplex, and four-plex units tend to provide the most opportunities with the least risk for new investments. Finally, as with any other real estate investment, you’ll want to complete your due diligence to ensure you’ll realize a solid ROI. Take a close look at the fair market value of the unit to ensure your rental income will exceed the overall net operating costs of the unit. That includes not just the mortgage payment itself, but also the insurance, taxes, and property maintenance. Don’t forget to look at the rental market in the area, too. If you think you’re in a situation where you can fill vacancies quickly, you have an investment you may want to consider.
If you’re ready to consider multifamily real estate investing, we can help. Contact us today to learn more about what connecting with an experienced real estate investment team might mean for your portfolio.
