Building an investment portfolio is a critical task that needs to be attended to thoughtfully. There are several options to choose from when building your investment portfolio. But real estate is considered one of the most lucrative of these options due to its less volatile nature and the fact that there can be many winning strategies. One such strategy is investing in multifamily properties. But the main question here would be, are multifamily properties a good investment?
And if they are, then why? Should you invest in small multifamily properties or large ones? And for the uninitiated, what even are multifamily properties?
Multifamily properties, as the name suggests, are residential properties with more than one rental unit. Large multifamily properties are also called apartment complexes, whereas small multifamily properties can range anywhere from duplexes, triplexes to fourplexes or quadplexes. These are not considered a type of property on their own but are quite an important and lucrative subcategory for beginner investors. So, now the question is why choose small multifamily home investments?
Are Small Multifamily Properties a Good Investment?
There are several reasons to prove that A is a good investment. To find out how, read on…
The Price of Purchase
People invest in multifamily properties because they provide much less hassle than owning multiple single-family renting houses. Imagine owning 12 different rental houses. You will have to have separate loans for all the properties, do all of their inspections, the sheer amount of paperwork that will follow will blow your mind. But if you bought just one multifamily property with 12 renting spaces, your work is cut almost in half. Small multifamily property investment for you can be slightly more than a house, but it will certainly be less than an apartment complex.
Passive Income Source
Investing in real estate can be a really valuable source of passive income for you. But it also comes with its own set of risk factors. This is where small multifamily investment opportunities really make their mark. They are a safer option to consider as you grow your investment portfolio because you only have to take care of one asset as a whole.
Small multifamily home investments can provide you with a decent and regular cash flow. It is the income you incur after all your expenses. It will definitely be less than that from apartment complexes, but you still get the money coming in from more than one rental unit, while paying mortgage for only one property. That is surely a good investment strategy.
Small multifamily investment properties have somewhat lenient rules for financing as they are still considered residential loans. The level of scrutiny is much lesser than it is for commercial loans. The buyer will still need to meet several requirements before procuring a loan for their small multifamily property, of course. To get even more relaxed terms, you can live in one of the units and rent out the other units, with which you can start making money right away.
Vacancy and Non-payment Risk
With multifamily properties, the vacancy or non-payment risk is lessened quite a bit. Apartment complexes are obviously the most profitable and secure; but small multifamily investment homes sit right in the middle of single rental units and huge apartment complexes. You still get more than one cheque, so if one of the spaces gets vacant or the payment is delayed, you do not lose your entire income source.
It is a risk that the decline in the local area of your investment affects your rental units in the area. In this scenario, single family units are the safest and apartment complexes are the riskiest. But small multifamily properties can give you a middle ground. A localized threat will affect the rental property, but its financial implications will not be as large as that for commercial apartment complexes.
With small multifamily properties, you have a chance of decent scalability, especially if you are buying quadplexes. Scalability means how easily you can grow your rent portfolio. With small multifamily properties, you can increase your portfolio without breaking your bank each time you invest in a new property.
Single homes or small multifamily homes enjoy several tax benefits as compared to commercial rental investments, including mortgage interest deductions, depreciation, operating expenses, and so on. The government usually provides many relief packages to these owners as compared to commercial real estate owners.
Ease of Maintenance
These types of rental properties provide you with centralized maintenance. Although not at the scale of apartment complexes, but small multifamily properties also offer single roof, electrical maintenance, mechanicals, etc. Whereas for single homes, you will have to manage each and everything individually.
Drawbacks of Small Multifamily Properties
Like any other investing opportunities, small multifamily home investments also have some risks involved that you need to consider before investing. The main cons of this investment include less availability as compared to single family homes, higher costs as compared to single family homes, and more financing requirements. If you decide to live in one of the rental units, then an added drawback might be increased tenant interaction.
As you can see, there are several compelling reasons to invest in multifamily properties, especially the small multifamily homes. But there is another important factor to think about before making this investment. How involved do you want to be in the management of these properties? Some investors do not particularly enjoy the management of their properties and do not want to be involved too much in it. In that case, they hire a multi family property management company to do the work.
These companies are responsible for managing everything related to your property management. They help find residents for your rental property, collect rent from the tenants, address their requests and complaints, deal with defaulting tenants, maintain records, draft and execute new leases, conduct rate studies to find out suitable rent rates, and so on. Yes, hiring a property management company will cost extra, but it can be seen as an additional investment because it will make your life easier. Still, before jumping the ship, consider your needs thoroughly. Consider some factors to decide if you indeed need a property management company such as your future plan for acquiring more rental properties, your proximity to the asset, your willingness to manage the property, and so on.
The bottom line is that like any other investing opportunities, real estate investment allows for you to succeed through various strategies. There is no one size fits all. But one thing is for sure, if you are starting out as an investor or an experienced one already, small multifamily homes investment is one of the best and safest choices to choose from. It provides you with the ability to grow your rental portfolio quickly and allows for you to access better and easier financing opportunities. It is a sweet middle spot of real estate investment between owning commercial apartment complexes and multiple single-family houses.
So, hopefully with the given details, the question ‘Are multifamily properties a good investment?’ is answered for you satisfactorily.
Author Name: Liran Koren
I’m Liran Koren. I’m a real estate pro and co-founder of Luxury Property Care. I believe that through common work we can create a healthy ecosystem that serves investors, landlords and even tenants altogether.