Real estate is one of the top investment options to add to your portfolio. Owning real estate allows for diversification with an asset that can easily be liquidated and generates income. There are a lot of myths of investing, especially when the investment is a multifamily home.
A few of the myths of investing that need to be cleared up before investing in a multifamily home are:
Financing is More Difficult Than a Single-Family Home
Multifamily units are more expensive, so you’ll need to have a higher down payment. In terms of financing, if you don’t have the upfront capital, you may have difficulty obtaining a loan for the property.
Very few investors pay for the entire property in cash.
Multifamily properties do have some advantages that make them easier to finance under the right circumstances:
- Strong rental history and current lease agreements can help make financing easier
- The more units available, the less risk of an entire property being vacant
- Investors will have to close on a single mortgage, rather than multiple loans, when investing in a multifamily unit
From an investment standpoint, lenders often view investing in one of these properties to be less risky than a non-owner-occupied mortgage on a single-family home.
Owning and Maintaining the Property is More Costly
When you own more properties, you’ll have more costs. You’ll need to take care of multiple units, and your mortgage on the property will be higher. Maintenance costs may be higher overall, but they’ll be less per unit than they would be otherwise.
For example, you’ll be able to use your property as leverage when negotiating contracts.
If you have a maintenance team that will help provide routine maintenance to units, it’s possible to negotiate lower rates when more units are available. The contractor benefits from less travel and also enjoys guaranteed income from the property.
You’ll also only need to pay for:
- One roof
- Single landscaping
- One management company
Management companies can handle the operation of all units, and since all of your units are at a single location, you may be able to negotiate a lower rate.
It’s Hard to Value a Multifamily Property
The value of a multifamily property isn’t hard to calculate. In fact, you can calculate the rate by dividing your net operating income by the cap rate. Owners that want to increase the value of their property can do one thing (aside from renovating): raise rental rates.
Raising rates can be difficult if your rates are already at or higher than the going rates in your area.
Property improvements can help justify rate increases and reduce the risk of units remaining vacant for long periods of time. Lowering expenses can also raise net income, but you need to be strategic when lowering rates.
Installing more efficient heating units, fixtures and lighting may be a good option for you to lower expenses and improve property value. Renegotiating contracts with landscapers or maintenance teams is another option.
While there are a lot of myths of investing in rentals. Now that you have the facts, you can make an informed decision when making your investment.