Many people decide they want to invest in rental property but aren’t sure where to begin. A logical first step for many investors is to buy multifamily property. Multifamily real estate investing is a popular form of real estate investing. It’sMost people can understand an asset class, having rented an apartment or owning a home previously.
People can understand the basics: each unit needs to have a functioning kitchen, bathroom, and some combination of bedrooms and living space. Rentals typically run on month-to-month or annual leases using simple, straightforward paperwork.
In short, for the masses, buying multifamily property is a lot less complicated than investing in office space, retail, hotels and other asset classes. It’s a great way to get started with commercial real estate investing.
What Is a Multifamily Property?
A multifamily property is any property that has more than one unit. The smallest scale multifamily properties are duplexes, known as “two-families” in some parts of the country. Triplexes and four-plexes are the next steps up, having three and four units each, respectively.
Two- to four-unit multifamily properties are a great way for first-time investors to dip their toes into the rental property waters as they are typically financed by banks in the same way as are single-family homes. Many investors will begin by owner-occupying a small multifamily property. In other words, they’ll live in one unit and rent the other(s). There are many benefits to doing so. At MJS Construction Group, we offer a wide range of duplex build.
For instance, owner-occupied properties tend to qualify for more advantageous financing with lower interest rates and less down payment. By living on-site, the investor can more easily manage the property. Most will even self-manage. This can save hundreds of dollars each month on property management fees. Sometimes an investor will buy a multifamily property without the owner occupying it or hiring a property manager, making management more time-intensive since it requires the owner to visit the unit in person for repair and maintenance requests.
More significant multifamily properties, those with five or more units, start to fall into the “commercial real estate” category. Properties with 5+ units typically qualify for a different type of financing, which is usually more expensive than properties considered strictly residential.
Multifamily property can continue to scale to include hundreds, even thousands, of units. Large apartment complexes, for example, and high-rise apartment buildings are other examples of multifamily property. Sometimes multifamily property will cater to a specific demographic, such as students or seniors, but this is not always the case. The majority of multifamily properties are agnostic to demographics (aside from catering to the general local demographic).
Reasons to Invest in Multi-family Real Estate
More Expensive, but a Lot Easier to Finance
In most cases, if not all, the cost to acquire an apartment building will be significantly higher than the price to purchase a single-family home as an investment. A one-unit rental could cost an investor as little as $30,000, while the cost of a multifamily building can go well up in the millions.
At first sight, it might seem as though securing a loan for a single-family property would be a lot easier than trying to raise money for a million-dollar complex. Still, the truth is that a multifamily property is more likely to be approved by a bank for a loan than the average home.
That’s because multifamily real estate consistently generates a strong cash flow every month. This remains the case even if a property has a handful of vacancies or a couple of tenants who are late with their rent payments. If a tenant, for example, moves out of a single-family home, that property would become 100% vacant.
On the other hand, a ten unit property with one vacancy would only be 10% unoccupied. As a result, the likelihood of a foreclosure on an apartment building is not as high as a single-family rental. All of this equates to a less risky investment for a lending institution and can also result in a more competitive interest rate for the property owner.
Growing a Portfolio Takes Less Time
Multifamily real estate is also very suitable for property investors who wish to build a relatively extensive rental units portfolio. Acquiring a 20 unit apartment building is a lot easier and more time-efficient than purchasing 20 different single-family homes.
With the latter option, one would need to work back and forth with 20 different sellers and conduct inspections on 20 houses located at a different address.
Additionally, this route would also require an investor to open 20 separate loans for each property in some cases. All of this headache could be avoided by simply purchasing one property with 20 units.
You’re in a Position in which Property Management Makes Financial Sense
Some real estate investors do not enjoy the actual management of their properties and instead hire a property management company to handle their rentals’ day-to-day operations. A property manager is typically paid a percentage of the monthly income that a property generates. Their duties might include finding and screening tenants, collecting rent payments, handling evictions, and maintaining the property.
Many investors who own one or two single-family homes do not have the luxury of contracting an external manager because it would not be a financially sound decision due to their small portfolio. The amount of money that multifamily properties produce each month give their owners room to take advantage of property management services without the need to cut into their margins significantly.
Average Costs of a Multifamily Home
Like any real estate, a multifamily home costs depend on several factors — location, condition, the age of the property, and more. Generally, a multifamily unit (one rentable section of the property) is on par with other nearby single-family homes, at least from a price-per-square-foot standpoint. Planning for a new look for your house? Look no further! MJS Construction Group is here to help in your dual occupancy builder Melbourne.
Upfront, you’ll need to budget for expenses like the:
- Down payment
- Closing costs
- Property inspections
- Renovation and repair costs
One way to save cash — at least on the front-end of your investment — is to live in one of the units and utilize owner-occupied financing for the property. This allows you to take advantage of low down payment requirements that aren’t typically offered to investors.
Regularly, you’ll need to cover things like:
- Property Insurance
- Ongoing Repairs and Maintenance
- Management of the Property (If You Choose to Outsource That)
- On-Site Security
- Landscaping and Common Area Upkeep
You’ll want to estimate these costs as accurately as possible before deciding to purchase a multifamily home (and before setting your rents); however, keep in mind that they can and will change over time. Insurance premiums fluctuate, and repairs may be light one year and highly costly the next. Be sure you have a healthy financial cushion to cover these unexpected costs just in case.
Pros of Multifamily Investing
More Cash Flow Possibilities
If purchased right, multifamily properties have a likelihood of producing positive cash flow from day one. Also, rents can be increased a small amount for each unit or expenses decreased, and the ripple effect of those changes can cause considerable increases in cash flow.
One Loan, Multiple Units
Trying to get a loan is a long, arduous process that no one enjoys. But it is a necessary evil for most real estate investors. This is a huge benefit of investing in multifamily properties: there are fewer loans to obtain! If you were to go out and buy 20 SFRs in the next few years, that’s 20 loan applications you’d need to fill out, 20 financial statements you need to prepare, 20 “yeses” you need to hear from the underwriting department. Exhausting, isn’t it? Instead, you can buy a 20-unit apartment building and get just one loan—one application, one set of financials, only one yes.
One Insurance Policy
I hate insurance. I understand the importance of it, but the insurance world is just so cumbersome and frustrating. A good amount of my wife’s administrative time is spent just dealing with insurance. We have boxes and boxes of paperwork with nothing but insurance documents. When you invest in a multifamily property, you have one insurance policy on it. It’s so much easier to keep track of and manage!
Math Over Emotion
When investing in multifamily units, I am able to separate emotion from the transaction much more quickly than with a single-family home. Multifamily is all about the math, the numbers!
Business, Not Hobby
Furthermore, it’s much easier to treat multifamily investments as a business rather than a hobby because of the beast’s nature. Multifamily properties are designed for investors to own and management companies to run; thus, hiring such a management company is often figured into the cost of owning the property, leading to less hands-on-management by you.
As I mentioned earlier, multifamily units with more than five units are not valued the same way as SFRs. If I were to sell you my single-family home, the appraiser would look at a few other single-family homes that were similar and base their appraisal on those other homes’ selling price. Commercial properties, on the other hand, are valued based on the ROI they give their owners. After all, it’s not easy to compare a 24-unit apartment building with another 24-unit apartment building with the same returns because you’ll never find that exact similar property. Commercial investments are too different from one another.
Instead, we rely on the cap rate to base value on. If these three properties that recently sold gave the owner a 10% ROI, this one should also. So why is this income valuation so important? Because the value can be changed internally, rather than relying on others, by simply lowering expenses or raising the income. Small changes to the income can make drastic swings to the property’s value, and a savvy investor can use this to their advantage to supercharge the wealth-building process. Finding the right duplex build is an important decision. Check out our range of the best home design constructions at MJS Construction Group.
Less Competition From Homeowners
When shopping for a single-family home, an investor is competing against tens of thousands of others looking for a home. Most of this competition is in the form of non-investors who buy property for way too much money because the front porch is “so cute” or the backyard is “perfect for Fido!” This can make competition much more difficult because you are playing the game with a different objective! Instead, when you buy multifamily properties, you are competing with other investors, which means there is far less competition.
Okay, multifamily properties sound pretty terrific. So what’s the downside? Let’s find out.
Cons of Multifamily Investing
First, multifamily properties typically cost much more to buy than a single-family house. This can be a barrier to entry for many people trying to get started, so multifamily is often not considered until much later in one’s investment career. That said, smaller multifamily properties have lower down payment financing options, and more significant multifamily properties often include raising money from other people.
More Management Intensive
I’ll be the first to admit it, multifamily tenants cause more headaches than single-family tenants. They are generally more “transitional” and thus have much more drama in their lives. Tenants stay for shorter periods, which can add significant expense to your bottom line. They call and complain for more petty reasons, have more difficulty paying the rent on time, and tend to be harder on units because they don’t always feel like the place is their real “home.” As I mentioned earlier, multifamily properties are often managed by third parties, so the owner doesn’t need to be very involved in the management drama.
More Savvy Competition
Although there is less competition from homeowners when investing in multifamily properties, the folks you are competing against are far more sophisticated than the average homeowner. They can spot a deal just like you can and generally have a lot more capital with which to buy those deals.
Most people can easily wrap their heads around a single-family investment property. Still, the more units in a property (and the more expensive than the property is), the more complicated it all becomes. Suddenly, you are dealing with 20 moving parts rather than just two or three.
Fewer to Choose From
Depending on where you live, there may be a lack of available multifamily properties from which to choose. While single-family homes are plentiful across the world, multifamily properties may be more sparse in your location.
Finally, when you invest in multifamily properties and raise money from others to fund them, you enter a whole new world of government regulations that dictate what you can and cannot do while raising that money. If you do it wrong, you might end up wearing an orange jumpsuit and earning $1.38 an hour serving soup to other white-collar inmates.
Is a multifamily home the right move for you?
Purchasing a multifamily home to live in and rent out the other units can be a great way to kickstart your real estate investment strategy. And it can help you build wealth over time faster than you otherwise could.
Living in a multifamily home and being someone else’s landlord isn’t suitable for everybody. Consider the advantages as well as the drawbacks before you decide to move forward.
Much like stocks, real estate investing allows for one to be successful through several different strategies. One of the most popular ways to invest in real estate is to own a collection of rental properties. Properties that only have one residential rental unit are commonly referred to as single-family properties, while apartment complexes with multiple rental units are known as multifamily properties.
There are many advantages to owning multifamily real estate. These include access to more manageable and better financing opportunities, the ability to quickly grow one’s rental property portfolio, and the luxury of hiring a property manager.