Just like short-term investing, multifamily real estate investing is on the rise among seasoned real estate investors.
Driven by the potential for doubling one's rental income in an incredibly short time frame, all with just one added cost, many investors have started to look at multifamily properties as THE strategy for expanding their portfolio and building equity faster.
But are multifamily investments really the foolproof, wealth-building strategy so many investors believe it to be?
As a result of the financial struggles caused by the ongoing pandemic and a dramatic rise in competition, multi family homes have started to shed the long-held image of easy, incremental ROI, with even the most experienced investors averaging a mere 6% cash-on-cash return.
So, what are the advantages and disadvantages of investing in multifamily rentals as 2022 approaches, and are they really the best option for newer real estate investors looking to grow their income in a sustainable way?
Here's all you need to know about multifamily real estate investing — the good, the bad, and the unexpected!
5 Reasons to Invest in Multi-Family Properties
Real estate investing has long been one of the most popular investment options for those looking to generate reliable passive income with a steadily appreciating asset, rather than put all of one's eggs in a volatile, hot-and-cold basket like the stock market.
The main reason why investing in multifamily properties has been the preferred way to generate additional income in real estate for so long comes down to return on investment, portfolio appreciation, and monthly income.
While financing and managing an apartment complex or any other multifamily property type can be a lot more complex than investing in single-family homes, the hefty return on investment that would usually come with owning multiple units will more than make up for it if you play all your cards right.
But let's take a closer look at why multifamily investing has become so popular in the world of rental real estate, listing five key reasons why multifamily real estate investing might be a good idea for your business and financial goals.
1. Strong and consistent cash flow
As we've hinted at before, multifamily real estate's potential for generating impressive cash flow in a short period of time is the main draw of this investment strategy.
Owning a multifamily property will generally guarantee a hefty cash flow coming in each month from what is essentially one single investment, helping investors expand their portfolio a lot quicker than they would by investing in a single-family home and buying more homes further down the line.
On top of that, investing in multifamily real estate can often be a cheaper investment than purchasing multiple single-family homes, as the value of each unit in your building will be higher but less expensive than a single home. This is true even though the upfront cost of purchasing an apartment complex is often higher — so make sure you have your financing figured out before you commit to investing in a multifamily rental property!
In short, multifamily properties pay off in the long run: If you're willing to put in the time and put hefty capital down to secure a promising property, you'll reap the rewards in the form of high rental income and impressive scalability.
2. More equity in no time
Since multifamily properties with multiple units are considered a single investment, this investment strategy is also highly valued among investors who want to build an impressive portfolio in a short amount of time.
While considerably more expensive, investing in multiple units upfront is a lot easier than investing in a single-family home and purchasing more real estate later.
This means that on top of building your authority as an investor to watch out for faster, you'll be building more equity in a shorter time span than you would with any other investment option.
This is a compelling reason to start investing in multifamily real estate if you're an ambitious investor looking to finance more projects and build considerable wealth within as little as two to five years.
3. Fewer and less expensive vacancy periods
In addition to strong cash flow and even stronger portfolio and equity building, investing in multifamily properties is a great strategy for more risk-averse investors. Rather than having one rental property as your only source of rental income, you'll be creating multiple cash flow streams from a single lower-risk investment.
This means that while tenant turnover rates might be higher during the span of your ownership, it will also take a lot less time to fill each unit with new tenants, reducing expensive vacancy periods and boosting your estimated monthly income even more.
Long and frequent vacancies between tenants can break a rental business completely, whether you're dealing with a short-term or a long-term rental.
4. Tax benefits
The generous tax benefits you can claim as a multifamily owner are another compelling reason for investing in multifamily real estate.
For example, you could choose to take advantage of depreciation by doing a cost segregation study on the entirety of your property, taking the deterioration of plumbing and electrical fixtures into account to write off some of your property's net operating income, reducing your tax liability in return.
Even though all property owners can use cost segregation and depreciation to their advantage, the sheer volume of features you'll be able to account for between all the units you own will considerably reduce your tax return.
On top of that, you could also take advantage of the IRS 1031 exchange if you decide to sell further down the line. This clause allows you to defer capital gains taxes on a profitable sale by reinvesting the proceeds into another property of "like-kind".
If you're an ambitious investor who's looking to invest in new projects and sell their assets for a profit, you could continue deferring indefinitely, growing your income over time basically tax-free.
5. Passive management
Finally, a great reason to invest in multifamily properties is the potential for truly passive, easy property management, which is an outstanding incentive for investors with little time on their hands but plenty of goals in mind.
While hiring a property manager for a single-family home or vacation rental can be expensive and eat into your profits, enlisting the help of a property management company can be quite affordable when you own multiple properties and deal with multiple tenants.
Having a property manager deal with the daily headaches of being a landlord, including repairs, emergencies, bad tenants, and marketing, will give you more time to think about the big picture while earning passive income through it all.
Being a landlord might be a full-time job for most, but if you play your cards right, it doesn't have to be!
Benefits and Risks of Multi-Family Investments
But while there are plenty of reasons why you should consider investing in a multifamily property as your next big investment, that doesn't necessarily mean that it would be the right choice for your circumstances.
Financing and managing rental properties is hard enough without having to deal with multiple long-term tenants and multiple units, so if you want to generate good cash flow without any of these added headaches, you might want to stick to single-family investments and profitable, easy-to-manage vacation homes.
To make the choice a little easier, here are the biggest pros and cons of investing in a multifamily property.
The benefits of investing in a multifamily property
So to recap, there is possibly no better real estate investment than multi-family real estate for building passive wealth and equity over a short period of time.
The consistent and sizable cash flow you can generate by owning an apartment building with multiple families renting your units can easily help you scale your business in a matter of a few years. This is especially true when you consider the generous tax benefits that come with it.
Scalability is a key factor when considering any investment, as you'll want to continue investing in new projects with the income and financing you're receiving to build wealth that lasts generations.
So, when you invest in a multifamily property you'll be setting yourself up for success by expanding your real estate portfolio quicker. You might even turn your 5-unit apartment complex into a commercial real estate project, creating even bigger cash flow opportunities.
On top of that, the ease of property management makes multi-family investing one of the very best passive income streams you can add to your growing portfolio, giving you the best of both worlds: Hands-off daily management and hefty investor cash flow.
The risks of multifamily investing
On the other hand, the main risk of owning a multi-family property lies in its signature complexity: You won't only need a lot of capital to purchase your dream apartment complex, but you'll also have to deal with rising competition.
As we mentioned before, the multifamily market is not what it used to be and you'll soon find yourself competing with big-shot developers and well-established commercial investors for the same piece of land, driving the purchasing price higher.
If you also consider that the generous cash flow and ROI usually associated with a multifamily property is shrinking as a result of a nationwide economic downturn, the risks of investing in a large building with multiple units become even more apparent.
More money, more problems?
That certainly seems to be the case when it comes to this type of investment property: Tenants signing contracts and leaving at a rapid pace means you'll have a lot less time to vet each applicant carefully, increasing your risk of welcoming a bad tenant who will default on rent payments or leave the property in abysmal conditions.
The increased turnover also means more wear and tear all around, meaning that you'll have to deal with more repair and upgrade work than you would with a single-family property or vacation rental.
While your property manager will take care of most of these issues, that doesn't mean that the cost of their help won't eat into your budget if vacancy periods, defaults, and other profit-ruining problems increase.
If you're not ready to deal with some fierce market competition, costly property management fees, skyrocketing upfront costs, and bad tenants, multifamily investing might not be for you!
Multifamily Real Estate Investing: The Bottom Line
So, what other avenues are there if you're looking to dip your toes into profitable real estate investing?
If the complex nature of multi-family real estate makes this option a less than ideal candidate for your wealth-building dreams, short-term rental investing might just be the answer you've been searching for!
The perfect fit for both new and experienced investors looking to grow their portfolio and generate consistent passive income with fewer risks, vacation rentals are, in many ways, the new multifamily property —hefty cash flow and scalable opportunities included!
Lucky for you, short-term rentals are our bread and butter, and we can help you get the most from every single dollar you put in — get in touch today to learn more!