Are you ready to start investing, but not sure where to start? Maybe you’re not interested in the stock market right now, but you want to build an investment portfolio with a lot of advantages long term. A real estate is an excellent option. With real estate, investors can actively grow their capital in a way they couldn’t with a stock market fund managed by someone else. One of the simplest ways to get started in real estate that will have the biggest impact is to invest in a multifamily property.
What is a multifamily property?
A multifamily property is just as the name suggests, a residential property that houses multiple families. This can range from a 2-unit duplex to a large 100+ unit commercial apartment complex. A property with 2-4 units is often a good place to start for first-time investors, with fewer units to manage and less to finance.
Five units or more often places the property in the commercial real estate category, rather than being strictly residential, and may require a different type of financing. However, this does allow the investor to start growing a more commercial portfolio if that is where their interests are. Here are some points taken from Market Apts website.
Why multifamily?
1. Easier to finance
Banks consider multifamily properties less risky than multiple single-family homes. You’re more likely to be able to pay your mortgage even with vacancies because of how many individual homes there are and how many people are paying rent. If a family moves out of a single-family home you are renting, it is 100% vacant, but if a single-family moves out of a 4-unit property, it’s only 25% vacant, and so on.
Even if 10 families move out of a 100-unit property, it is still only 10% vacant. This makes you more likely to be approved for a bank loan with a more competitive interest rate because of the lower likelihood of foreclosure.
2. Consistent monthly income
Consistent cash flow is easier to maintain in a multifamily property. Especially if your property is one where you can fill vacancies quickly, as long as your income will exceed your net operating costs (the costs of the mortgage, maintenance, management, insurance, etc.), you can expect consistent monthly income from rent payments.
Investing in multifamily properties offers a financial safety net for life events such as maternity leave. The steady stream of rent from multiple units can effectively counterbalance any temporary dip in other income sources.
3. Helps you expand your portfolio quickly and with greater diversity
Your portfolio as an investor is easier to grow with multifamily properties than with single-family homes and the growth is far more efficient. Investing in a 10-unit building versus 10 single-family homes requires fewer loans, fewer insurance policies, and only one time trying to buy and invest instead of 10.
There is also a greater diversity of products in the various building types and locations you’ll be looking at with multifamily investing. There are smaller residential properties like duplexes, brand new apartment complexes just being constructed, townhome communities, senior living communities, and so much more. Add to that the benefit that larger complexes fall under commercial real estate, your portfolio could be as diverse as you are hoping to build it.
4. Slow but steady appreciation of portfolio
As with any type of investing, you must expect that there will be ups and downs over the years. No worthy investment comes without risks. Having said that, those who invest long-term will discover that the value of multifamily properties tends to increase over time and is more resistant to economic downturns. Values still fluctuate in multifamily real estate, but over the years they tend to rise steadily.
5. Possible passive income
With the consistent cash flow of rent payments, you can afford to pay for property management and do less in the day to day. If you prefer a less hands-on approach to managing the properties you’ve invested in, take advantage of the companies offering those management and maintenance services and enjoy the passive income.
6. Fewer barriers to entry than other commercial real estate options
Investing in multifamily real estate is less complicated than investing in office or retail spaces, hotels, etc. It’s a great way to get started with commercial real estate investing, without the headache of other types of properties and is the perfect place to start for a beginner interested in building a commercial portfolio.
7. Simplicity
For the investor, buying multifamily real estate is a straightforward, simple process compared to other types of investing. With a single large property, there is only one loan to worry about and one property to insure. Insurance companies familiar with multifamily properties can draw up the policy for you and get things going right away.
Potential drawbacks
- There are fewer barriers to entry for small single-family properties
- Greater initial expense (a large property can be costly to invest in upfront)
- More to manage and maintain
- Greater competition from more experienced investors when trying to purchase
Investing in multifamily properties has many advantages
If you can make it happen, investing in multifamily properties is the way to go. There may be a learning curve if you are new to it, with a lot to manage, but hiring a property management company to help with the day-to-day can make running everything a breeze. Plus, the perks (including passive income) are well worth the effort.
There is little doubt that your primary focus will be single-family homes when it comes to real estate investing. A great method to study the fundamentals of the real estate investing business is to discover how to buy, remodel, sell, and even create a steady rental income.
