Multifamily homes are one of the best starting points for any new real estate investor who wants to purchase a property for passive income. A small multifamily property can boost your cash flow and grow your portfolio fast.
Its ease in financing makes it one of the best choices for beginner investors, and experienced investors consider it a basic type of investment in commercial real estate. It is less tedious and not as complicated as investing in other commercial properties. But before you jump the gun, you should fully understand what you are getting yourself into if your eyes are set on investing in a multifamily home. Here is all that you need to know.
A multifamily home is a residential building that is set up to house more than one family. There is no limit to the number of units that it is separated into. It can be a single or detached house. It can also be a small apartment that has up to four units. When the number of units exceeds four, it becomes a commercial property.
Each unit in a multifamily home must have its kitchen, bathroom, a separate entrance, and utility meters.
Types of Multifamily Property
Below is a list of types of multifamily properties that you can choose to invest in. Each has its unique features and amenities.
Duplex – This is a building with two floors and two separate housing units. There is a different family in each housing unit. The building has one front door and foyer that are shared by both units. Still, they all have different entry points.
Triplex and fourplex – Triplex and fourplex are very similar to a duplex, but there are three and four housing units respectively.
Townhouse – These houses share one or two walls with other units. However, they have their own private entrance. They often extend in a row and can be up to two or three stories high. Also, they are commonly found in the outskirts of cities.
Semi-detached houses – Semi-detached houses have a similarity to townhouses because they share one wall. However, they only contain two units.
Apartments/condominiums – Apartments and condominiums are common in cities. Generally, the houses have close to five separate units. An apartment community shares grounds and amenities such as parking, a gym, a swimming pool, and a garden.
While most multifamily properties are residential properties, some fall under the category of commercial property. The difference lies in the purpose of the property. If the property is meant for a return on investment, then it is a commercial property.
Any property with more than four housing units is considered a commercial property. Anything less than four units is, by convention, a residential property.
Why Should You Invest in a Multifamily Property?
Before you make any investment, you need to consider the benefits and pitfalls that you may face during the investment. Multifamily homes present new real estate investors with an opportunity to grow their returns instead of placing their money in a volatile market like the stock market. Here are some of the reasons why you should invest in a multifamily property.
Expensive But Easy to Finance
The cost of acquiring a condominium or apartment is not comparable to purchasing a single-family home as an investment. You may end up paying more than $30,000 for one unit or millions for a whole multifamily building.
At first, the thought of having to raise millions for a multifamily property may be off-putting. You may opt to secure a loan for a single-family property instead. However, asking for a multifamily property loan is much easier than getting a loan for a single-family property. Banks’ approval rate is a lot higher since the property generates a fair amount of cash flow every month.
A property having vacancies or late rent payments from tenants does not affect the approval rate by banks. One vacancy in a ten-unit property only leaves 10% of the property in an unoccupied state. On the other hand, if a tenant moves out of a single-family home, the property is left 100% vacant. Therefore, you are less likely to face foreclosure on a multifamily property than on a single-family property.
It Takes Less Time to Grow a Portfolio
If your goal is to grow your investment portfolio of rental units within a short time, then multifamily real estate is a suitable investment option. It is easier to acquire a 25-unit apartment unit than to purchase 25 different single-family homes.
If you want to get the single houses, you would need to speak to each seller and inspect each home. This would consume a lot of time. Moreover, you may have to get a separate loan for each property. Fortunately, you can easily avoid this by getting one building with all the 25 units present.
It Allows You to Hire a Property Manager
If you do not relish the idea of managing your property, then you may have to hire a property manager. A property manager typically receives a percentage of the income that the property generates. Hiring a property manager for only one or two houses is not a good idea since the portfolio is small.
Growing Rental Demand from Millennials
Home prices have been on the gradual rise since the financial crisis of 2008. As a result, millennials are struggling to own homes. The US Census Bureau recorded a drop in the national homeownership from 65% between 2012 and 2013 to 64% in 2019. A new survey from Apartment List shows that millennials have a lower homeownership rate than any other generation, currently at 47.9%. Generation X stands at 69%, baby boomers at 77.8%, and the silent generation at 77.8%.
Since owning homes is not an option for many millennials, they find solace in renting rather than making home purchases. They also prefer the flexibility of moving from one place to another.
There Is a Multifamily Demand That Rose Due to Urban Renaissance
Over the past several years, many cities in the US have developed into big metropolises. Such atmospheres have been a crowd-puller for young adults and the older generation of baby boomers. With most of the houses available in cities set up as multifamily rentals, it is hard for a property to lack occupants.
It is common for the older generation to downsize from a larger house to a multifamily rental. Therefore, demand for such property is expected to remain at its peak for quite a while.
Enjoy a Preferential Mortgage Market
When you own a multifamily property, you enjoy a preferential mortgage market and a cheap acquisition cost. Loans for other types of commercial properties do not compare to loans for multifamily commercial property. Multifamily property loans have a low-interest rate and better terms.
Receive Tax Incentives
You will receive a favorable tax incentive when you own a multifamily property. Besides, you can depreciate the capital expense to eliminate the tax duty as soon as you acquire a multifamily property. While other commercial properties can only depreciate to 39 years, you can decline the capital for 27.5 years.
Ability to Adjust Rent Depending on the Market
Renting out multifamily properties on a monthly or yearly lease is quite common. However, it is different from other commercial leases that run for five years and above. Since the market situation varies widely, you can use such a rental plan when adjusting the rent on your premises.
If there is a rise in market demand, you may increase the rent on your premises to increase your rental returns. The challenge arises during tough economic times. Since anything that goes up must come down, you may have to drop the rental prices during the low season.
How to Find a Multifamily Property
The search for a multifamily property is not easy. You can follow the traditional avenues like using a trusted agent, conducting an online search, or even attending foreclosure auctions.
However, the due diligence for this type of property is different from that of a single-family property. There is a need to conduct inspections, appraisals, and any other housekeeping tasks for all the tenants. Having different families as tenants may cause logistical complications. However, that should not stop you from conducting proper diligence.
Before you invest, you must ensure that all the deciding factors are in check. Therefore, you should inspect the property, look through the previous owner’s accounting records, and ensure that the numbers on rent and gross income make sense. You do not want to end up with a property that is not providing any monetary value or can’t be fully rented out.
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A multifamily property is one of the easiest forms of investment. Any investor, novice or expert, can invest without any major hurdles. The properties may have a higher purchase price and a more expensive maintenance routine than their single-family counterparts, but you can use them to increase your rental income quickly. If you want more details on the multifamily property, contact us. We’d be more than happy to help you through your property investment journey.