If you are considering getting into real estate, investing in a multifamily property is arguably the first thought that crossed your mind. This has long been the easiest way to get into the industry for most investors, and for the right reasons. However, like any other investment, multifamily real estate has its advantages and downsides.
Today, we’ll look at both the pros and the cons to help you make a sound financial decision.
What is Multifamily Real Estate?
If you are not familiar with multifamily properties, they are buildings that have multiple residential units within a single building or complex. They are different from office block buildings in that each unit has its own kitchen and bathroom to comfortably accommodate a “household.” Some multifamily real estate terms and examples you’ll come across are multi-unit properties, apartment buildings, duplexes, and commercial real estate (CRE).
The Pros of Investing in Multifamily Real Estate
Multifamily properties generally have a promise of a more reliable monthly cash flow from rental income. This is because they house several tenants and thus multiple people paying rent. Therefore if there’s a vacancy, you’ll still get cash flow from the other units. There’s also a higher potential for turnover compared to single-family real estate.
Multifamily real estate is considered a safer investment when compared to other real estate asset classes. This is because even in an economic recession, people will still need a place to live, unlike offices that are usually vacated. Multifamily properties will in fact increase in demand as some people will be forced to sell their homes, and this will continue even after the recession as people try to build back their credit scores.
Easier to Finance
Even though they require more capital, multifamily properties are easier to finance compared to single-family properties as they generate more income and are, therefore, more attractive to lenders. This is enhanced by the fact that the cash flow is steadier, and there’s lower risk even in the event of an economic downturn.
Economies of Scale
Investing in multifamily real estate allows an investor to benefit from economies of scale. This starts with bulk purchasing power when acquiring supplies, materials, or services. You will also enjoy cost efficiency as management can always lead to high expenses in insurance, property management costs, repairs, etc. The fact that you will also be able to engage professional management will also simplify management tasks.
Multifamily real estate lets you enjoy several tax benefits. Since it’s an income-producing asset, you’ll be allowed to depreciate the property’s value over time, even though it’s actually appreciating. If you used a mortgage, you can also make a deduction for the mortgage interest paid that year. This is on top of deducting your management expenses from the taxable income.
The Cons of Investing in Multifamily Real Estate
Higher Initial Cost
The obvious downside in multifamily real estate investment is that it requires a high initial expenditure. The lender will require you to pay a higher percentage as a down payment or reserve, which can be quite a significant amount depending on the asset. The closing fees and costs will also be significantly higher.
More Complex to Manage
Multifamily real estate requires you to address the needs and concerns of multiple individuals or families, each with their unique requests, needs, and requirements. You will also need to screen each before occupancy, and handle conflicts, while at the same time maintaining a relationship. You can of course engage property management professionals, but this will also cost a lot and will not completely withdraw your involvement.
More Regulations & Liabilities
Multifamily properties with more than five units are considered commercial properties and are subject to more government oversight. This means that you’ll have to comply with more regulations at the federal, state, and local levels. They are also subject to various tenant protection laws and regulations, which you’ll need to comply with. On top of that, you’ll be exposed to liabilities and legal disputes due to having multiple tenants.
However, if you verse yourself with the laws and regulations and get a good management agency, you can significantly minimize the downsides of multifamily real estate investing.