Multifamily Real Estate Investing: Pros, Cons, and Strategies

With more condos and apartment buildings providing access to pools, outdoor barbecue and hangout areas, on-site dry cleaning, and fitness studios, it’s no wonder over one third of people in the US are flocking to rent out such a living space. 

This is great news for real estate investors. Owning a property with more than one living space can help you scale your business and increase passive income. However, the way you fund your purchase, your knowledge of potential risks, and your understanding of the hottest markets can make or break your multifamily real estate investing journey.

Table of Contents:

What Is a Multi-Family Property?

Multi-family properties house multiple families, couples, and/or sets of roommates. Each property has their own designated living area with a kitchen, bathroom(s), and other necessities. The most common multi-family properties are duplexes, triplexes, townhomes, and condos or apartment buildings.

Benefits of Multi-Family Investing

Every investment comes with risks and rewards. The good news for those breaking into the world of multifamily investing is that they provide a numerous amount of benefits. Such benefits include the ease of obtaining financing, a larger cash flow, the potential to scale over time, and many more.

1. Simple to Finance

Multifamily investment properties pose a lower risk to lenders, making it easier to obtain the financing you need. If you were to invest in rental properties with only one tenant and then you lose that tenant, you (and your lender) could also lose a lot of money. Multi-family properties reduce this risk because you have multiple tenants.

With Revolution Realty Capital as your lending partner, you can secure a term rental loan for such a property with no personal income requirements and a 15% minimum down payment.

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2. Larger Cash Flow

Depending on the cost of your property’s maintenance, net operating income (NOI), and mortgage, there’s a possibility of still earning cash flow if you have tenant vacancies. More often than not, however, vacancies in single family properties can mean negative cash flow.

3. Potential to Scale

Starting small by investing in a duplex or other multifamily property can build a positive track record with direct private investors. This can lead to better funding for larger projects down the road.

4. Tax Benefits

One of the biggest benefits to investing in multifamily properties is the tax write-offs available. Real estate investment deductions allow you to write off expenses accrued from your investment, such as marketing and maintenance costs. Spending less than 500 hours a year on real estate allows you to pay passive income tax instead of the typical income tax, which means you’ll owe less in taxes each year. 

However, one of the biggest tax breaks is from depreciation. Over time, properties experience depreciation or “wear and tear” (even as their value increases). Deducting your property’s depreciation expense from your annual taxes can save you a significant amount of money every year.

5. Less Time Investment

It’s very possible for your multi-unit investment property to produce passive income. By hiring a property management company and having a go-to maintenance crew, you could earn money without having to invest too much time. 

Although these are some of the main benefits from investing in multifamily properties, everyone’s situation is unique. You may find that there are many more rewards available to you when investing in real estate of this nature.

Multi-Family Real Estate Investment Risks

Buying multifamily homes for investment also comes with risk. Focusing on the benefits is always exciting, but understanding the risks that come from investing in multifamily buildings can help you mitigate potential losses and setbacks.

1. Large Up-Front Investment

Multifamily buildings are typically larger and have more plumbing and utility work than single family homes. As such, they’re also more expensive. With a larger up-front investment there’s a higher risk for loss, but also potential for higher returns.

2. Less Liquidity

As a multifamily investor, your property may take longer to sell than single family rentals would be. You’ll need to review tenant leases to determine if it’s possible for you to sell without any tenants in the building (which can make the selling process easier), update damaged or broken locks and appliances, and find an agent who has previous experience with showings for multifamily properties.

3. Greater Competition

Multifamily investors are often very experienced – making the market more competitive. This can sometimes result in bidding wars, which can impact the bottom line. 

If you’ve weighed the risks and found the rewards to outnumber them, keep reading to better understand the strategy behind investing in multifamily units.

Multi-Family Investment Strategy

Your investment strategy should include what you’re looking for in specific properties, how much you can afford (and where your financing will come from), and your potential return – as outlined below. 

  • Analysis of the Investment: Notice each property’s location, number of units, average occupancy rate, and average monthly rent. Determine beforehand how many occupants you’d prefer as well as the areas that offer the best return on investment. 
  • Cap Rate: Your cap rate is one method for estimating overall ROI. To find this, use the formula: (NOI / property value) x 100%. 
  • Cash Flow Calculation: To determine your cash flow, subtract the property’s estimated repairs, monthly mortgage cost and ongoing maintenance from the rental income. 
  • Leasing Strategies: There are a number of ways to find tenants. Creating a website, setting up a referral program, or investing in paid advertising are just a few examples. 

Before diving into finding properties, make sure you understand what type of financing you may need for the types of property you’re interested in. If you’re looking for something that needs some updating, you’re likely better off with a fix and flip loan. New or already updated property may instead require a term rental or small balance commercial loan. All three of which can be obtained through Revolution Realty Capital.

Best Markets for Multi-Family Real Estate Investing

Part of your due diligence includes understanding the hottest rental markets around the country. By knowing these areas, you can make more informed decisions about the properties you purchase and where you focus most of your investment business.

Below are some of the best cities around the U.S. for real estate investing according to pwc. You’ll also find the average monthly apartment rent for each location based on data compiled by Point2

  • Salt Lake City, Utah
    Average monthly rent per unit: $1,562
  • Raleigh, North Carolina
    Average monthly rent per unit: $1,522
  • Tampa, Florida
    Average monthly rent per unit: $1,834
  • Charlotte, North Carolina
    Average monthly rent per unit: $1,559
  • Nashville, Tennessee
    Average monthly rent per unit: $1,694

Even if the multifamily properties you’re looking into aren’t apartment buildings, this data can give you a baseline for the average monthly rent of townhomes and other types of properties in each city.

Multi-Family Real Estate Investing Final Thoughts

Investing in multifamily real estate can help you scale your business much quicker than single-family properties can. To further level up your skill set and diversify your investment portfolio, consider looking into mixed-use properties after you’ve experienced the process of multifamily real estate investing. 

Investment opportunities are all around. If you’re ready to fund your next investment, Revolution Realty Capital offers a variety of private money loans to suit your needs. Contact us today to learn more about what we can do for you.

 

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Key Takeaways

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