Multi family homes are the best income generating assets and investing in them makes for the most profitable strategy in real estate. Higher rental income and lower investment risk are among the many reasons that real estate investors choose to put their money into multi family properties rather than into other types of investment properties.
Despite being the best income generating assets, multi family real estate investments can be tricky to handle and often, a lot of real estate investors end up losing their money. To help you succeed, we will not only show you why they are the best income generating assets, but we’ll reveal to you the cons you need to be wary of as well as what you need to make the best out of multi family investments.
The Pros of Investing in Multi Family Rentals
1- Economies of Scale
The time and effort invested in the process of looking for the best rental property to buy are leveraged when a multi family rental is acquired. Since each unit generates its own cash flow and rental income, independent of the other, the idea that you’ll be investing in the best income generating assets seems more true thanks to this economy of scale. The same concept applies when spreading property management costs over a larger asset base. While maintenance cost is surely higher for multi family homes, it will still be less (per unit) than that of multiple single family homes.
2- Higher Rental Income
When it comes to cash flow, you can bet on multi family homes to be the best income generating assets. The potential for higher cash flow increases the more units you have in the rental property. With multiple tenants, you can generate more rental income to offset the expenses. Moreover, when compared to single family rentals, multi family buildings will be generating more income per square foot. Owning a multi family property is, without a doubt, a shortcut to building your wealth in real estate.
3- Easier Investment Property Financing
If you are planning to finance your property purchase with a mortgage, buying a multi family property streamlines the process because only one loan is needed to acquire the best income generating assets. When compared to single family investments, the process is much easier. Instead of dealing with multiple mortgages from multiple lenders at the same time, with a single loan you can own a multi unit investment property.
Keep in mind that financing multi family properties with 4 units or less can be done with a residential real estate loan. Otherwise, you have to apply for a commercial real estate loan. In that case, lenders will want to look at your investing record to make sure you have experience in managing multi family properties.
4- Risk Mitigation
Risk is unavoidable in real estate investing but it can be reduced when owning the best income generating assets like multi family homes. When it comes to vacancy, a single family rental can have zero cash flow when it goes vacant. But with multi family property, if a unit is vacant, you still have other units to keep your cash flow positive or at a break-even point. This buffer that protects you from financial strain is a major advantage that you won’t get with single family homes.
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The Cons of Investing in Multi Family Rentals
1- Property Management
Managing multi family rentals can be more complicated. Dealing with several tenants means that you will have more management responsibilities like rent collection, maintenance, and dealing with tenants’ problems.
2- Not Easy for Beginner Real Estate Investors
Even though they are the best income generating assets, they tend to attract more experienced real estate investors due to their higher acquisition prices. This demand for higher capital leaves little for novice real estate investors who are getting started in real estate.
3- Tough Competition
When opting for a multi family rental over a single family rental, competition is likely to decline. However, the type of competition changes (remember, you’re up against more experienced property investors!) making it more difficult to find multi-family homes for sale and negotiate deals.
On top of the multiple regulations for renting out a property, multi family real estate investments come with their own regulations as well. As mentioned earlier, a multi family property with 5 or more units is considered to be a commercial property. For specific regulations, you will need to research the laws in your state before you can even begin to search for the best income generating assets.
How to Evaluate Multi Family Rentals
You want to make sure you find the best income producing assets and you can only do that if you know how to perform a thorough multi family real estate investment analysis. So, let us walk you through what you need to do.
1- Choosing the Location
When looking for a location for your next multi family real estate investment, you want to be searching in a place where the demand for apartments is higher than that of single family homes. A big city with a healthy economy and a low unemployment rate is the best location to own a multi family rental. Another advantage of investing in big cities is that you can use the rental property as an Airbnb investment. All you have to do is find a city with lax Airbnb regulations and year-round tourism.
Once you choose a city, you need to find the best neighborhood. For this, Mashvisor offers the best solution that can help you locate neighborhoods with the best income generating assets. Our heatmap analysis tool makes it easier to find the most profitable investment locations based on several criteria like rental income, occupancy rate, and return on investment (cash on cash return).
2- Real Estate Investment Analysis
To evaluate a multi family home, you should be able to calculate three important calculations: cash flow, cap rate, and cash on cash return. The multi family investment calculator from Mashvisor is everything you need to perform a real estate investment analysis. Instead of spending hours doing calculations, the tool will provide them for listed investment properties and much much more.
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