Multifamily real estate is a smart addition to any investment portfolio. Investing in multifamily real estate can help investors better manage their property, offers tax breaks and it’s also easier to finance these units.
Investors prefer multifamily properties because:
Management is Easier
Hiring a management company to collect rent, take care of complaints and make repairs on properties is easier and makes more financial sense when all rentals are in one building. While hiring a management company doesn’t make sense for one or two single rentals, the overhead cuts much less into profit margins with multifamily properties.
Insurance is also simpler in most cases. Policies will cover an entire building.
As your portfolio grows, a “blanket” insurance policy can be taken out that will cover all of the investor’s assets under one insurer.
Tax Breaks Can Be Significant
Investors should try to reduce their tax burdens by leveraging all tax breaks available. Multifamily units may be able to receive low-income housing tax credits, which are available to owners that:
- Construct affordable housing units
- Rehab affordable housing units
Renting out to low- and moderate-income tenants can help reduce tax burdens by subsidizing the acquisition, construction and rehab of these properties.
Financing Multifamily Real Estate is Less Difficult
Obtaining loans for four single homes versus a four-unit multifamily property takes more time, requires more paperwork and can be purchased with a single loan. The investor doesn’t have to handle multiple loans with different maturity times or deal with multiple mortgage payments every month.
Lenders also value multifamily real estate because they are less risky and generate strong cash flows.
A five-family unit that has one unit vacant only has a 20% vacancy, which is far less risky because investors are still generating income and the property is less likely to go into foreclosure.
Faster Way to Grow a Portfolio
Scaling a portfolio is easier when two to four units are added at a time. Multifamily units often have an easier barrier of entry when compared to hotels or commercial property, which are more expensive.
As the mortgage for the property is paid down, it’s possible to expand portfolios with new acquisitions. Cash flow from the properties in a portfolio can help the investor acquire more properties in the future, leading to multiple multifamily properties in the investor’s portfolio.
Cash flow is higher with multifamily units. If one family doesn’t renew their lease, the property will still generate cash flow each month. In the right market, the unit can be released quickly while still retaining income from other tenants.
CBRE research shows that during the past two recessions, multifamily real estate rents declined less than individual properties and remains more resilient during the 2008 – 2009 recession. In fact, during the two-year period, multifamily properties had lower rent decline, faster recovery and long post-recession rent growth.
Investors that want to diversify their investment portfolio and are interested in rental properties will find these multifamily units less risky than commercial or single-family rentals. Cash flow can help fund further acquisitions and make it easier to obtain future loans.