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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.
