July 8, 2022

Why You Should Invest in Multi-Family Properties

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Multi-family properties are all the rage in the current real estate market as investors shift their attention away from office and retail properties. During the COVID-19 pandemic, office and retail properties investment properties have dropped in performance due to restrictions. Now, investors are focusing their attention on investment options that are ‘pandemic proof’ such as multi-family properties.

A multi-family property is any type of residential building that houses more than one household such as a single-family home with a rental unit, to a four-plex, to a large apartment building. Typically, when you own a multi-family property you own all the units and the land, but with each unit is leased individually.

Multi-family properties are considered one of the most stable real estate investment assets.

Why are multi-family homes such fantastic investments?

Reliable income

Multi-family properties allow investors to boost their return while lowering their vacancy rates, particularly when compared to single-family residences. If one unit is empty for a period, the others will likely remain tenanted and cash flow will continue. This means that investors can rely on having a stable income to pay expenses.

Multi-family properties offer investors an excellent option to diversify their property portfolio. When the property is in an area where demand is strong, it can be relied on to generate passive income with minimal effort. In strong markets, rental units can be turned over easily and re-leased to ensure steady cash flow year in and year out. Residential rental rates are also typically predictable and stable.

During an economic crisis such as the COVID-19 pandemic, housing is always a required resource making multi-family homes a near fool-proof investment type. 

The ability to make improvements one unit at a time

Properties with updated finishes and amenities will demand higher rents. Investors can earn significantly higher returns on their investments and have added benefit to better quality tenants in units that have been recently updated. 

Investors looking to increase their rents and the overall value of their property can do so by renovating their units. Unlike a single-family property, units in multi-family properties can be renovated one at a time while the other units remain tenanted. This way, property owners can slowly improve their investment whilst still collecting rent. As leases terminate and units become, improvements can be to increase rent rates and capital gains.

Other real estate asset types, such as retail, industrial or office, don’t have the kind of staged improvement capacity.

Tax depreciation

Multi-family properties can be tax depreciated, generally over the period of 27.5 years, as opposed to commercial property which gets depreciated over 39 years. This helps investors earn a higher return by offsetting their rental income.

 Investors of multi-family properties can further increase their cash flow through cost segregation. Cost segregation allows investors to take their depreciation over 5, 7, or 15 years, which allows investors to greatly increase cash flow and build their portfolios.

Hire a property manager

Often, multi-family homes will generate enough income to justify the engagement of a professional property manager. Investors of one to two single-family properties often aren’t generating enough income to warrant the use of a property manager.

Hiring a property manager frees an investor’s time so they can explore other income-generating opportunities and continue to grow their portfolio. Furthermore, when you have multiple units with different tenants and leases, then engaging a property manager can be beneficial to handle day-to-day operations, relieving that burden from the property owner.

Easier to finance

While buying a multi-family home is usually more expensive than most single-family residences, they do tend to be easier to finance. Many erroneously think that financing a single-family or commercial property would be easier than an expensive multi-family property. However, multi-family properties are more likely to have a loan approved than even a single-family property.

Banks see multi-family homes as being a lower risk investment because they have consistently strong monthly cash flow. As mentioned above, this doesn’t change even if there are vacancies within the building, unlike a single-family or single-tenant commercial property which would have a 100% vacancy if the tenant moved.

Build your portfolio faster

 Investors who are looking to scale their portfolios often look towards multi-family properties. Buying one multi-family property is more efficient and usually has lower total costs than several single-family properties. Investors looking to purchase 4 different single-family homes need to work with four sellers, agents, inspectors and go through the finance and purchase process several times. This work and cost can be avoided by purchasing a multi-family property. 

Tips for Buying Multi-family Investment Properties

Investors who are looking to venture into multi-family homes should apply these three tips when searching for the right property investment to give them the best chance at a successful investment.

#1 Understand your potential income and costs

By accessing the neighborhood’s comparably leased properties, investors can collect data to estimate how much income a property can generate. The current leases at a property being considered for purchase may not be at market rent, giving you room for growth.

Investors who aren’t sure how much comparable units are leasing for should reach out to local property management companies. Often, these professionals are more than happy to provide comparable lease rates and estimates for a particular property in an effort to win your business.

It’s not unusual for a subject property’s costs not to be readily available. In these cases, we use the 50% rule and estimate that the costs are approximately 50% of a property’s income. This isn’t an exact figure that gives a decent ballpark for a safe estimate. 

Once you have the approximate income and expenses, calculate the net operating income (NOI) by subtracting the monthly expenses from the monthly income.

#2 Know your cash flow

 Characteristically, a multi-family property should have positive cash flow. Once investors have an approximate NOI, then the monthly mortgage payment can be subtracted from this figure to come to the monthly cash flow estimate. Most investors will use this number to decide whether a multi-family property is a good investment for their financial goals.

#3 Calculate your CAP rate

A capitalization (CAP) rate is the most used metric in real estate investment. It represents the rate of return of an investment. CAP rates are calculated by dividing the NOI of a property by its asset value. With new purchases, the property’s purchase price is used instead of its market value.

While CAP rates are an outstanding tool for comparing potential investments, they shouldn’t be the only indicator used to make an investment decision. It’s important to remember that there are several other property characteristics such as potential rental growth and location that are not considered in a CAP rate but will have an effect on your return.

Conclusion

There are many advantages to owning multi-family real estate. These include access to easier and better financing opportunities, the ability to quickly grow one's rental property portfolio, and the luxury of hiring a property manager. For this and more investments options, please reach out to our team at invest@infinity.re.

Posted By

Saman Yazdi

Saman oversees the identification, evaluation, and consummation of real estate strategies and investments. Throughout his career, he has raised over $1 billion in financing for commercial and residential properties.

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