One of the best ways to make money and build wealth is by investing in multifamily real estate. But which type of multifamily real estate should you invest in: a small multifamily property or a large apartment building? Which is a better investment?
It’s true that investing in apartment buildings with 5 or more units will typically earn you more rental income than investing in small multifamily real estate. At the same time, small multifamily homes come with a lot of advantages and can also provide a good rental income and cash flow.
So, should you invest in large apartment buildings or go for smaller multifamily homes?
Which Is a Better Investment: A Large Apartment Building or a Small Multifamily Property?
When we think about investing in apartment buildings, it’s easy to imagine. After all, if you live in the city, you probably come across these properties every day. However, owning a big apartment building isn’t for everyone. Buying a small multifamily property such as a duplex, triplex, or fourplex could actually be the better choice. Here’s why you should consider investing in small multifamily property over apartment investing:
1. More Affordable
The idea of investing in apartment buildings can be enticing. However, large apartment buildings may not be affordable to everyone. Small multifamily properties are the more affordable option in the multifamily market. This makes them an ideal choice if you want to get into the multifamily market but have a modest investment budget.
Since investing in apartment buildings requires more upfront capital, it would take you more time to save up for a down payment if you are using investment property financing. However, you can get into multifamily investing much faster if you invest in small multifamily homes. You don’t want a lack of enough capital to stop you from getting started in the real estate game. You may lose out on good investment opportunities if you keep waiting to have huge amounts of cash to get started. It’s better to start with what you have and grow from there than wait until you can afford to buy large apartment investments. Sometimes later becomes never.
2. Easier to Manage
Managing an apartment building with over 5 units can be daunting. However, small multifamily homes will have fewer units and tenants to maintain and manage. If you want less responsibility, you should probably consider buying a duplex instead of a large apartment building.
If you live nearby or are house hacking, you can easily manage the property yourself. Multifamily properties with more than 4 rental units are more challenging to self-manage. You may have to hire a property manager, which eats into your profits.
3. Location Diversification Is Easier
Of course, small multifamily homes will be cheaper than large apartment buildings. This means that it would be easier for you to purchase more multifamily properties in different locations. As a result, you will diversify your real estate portfolio and reduce risk.
Investing in apartment buildings will limit your location unless you are very rich and can afford to buy different apartments in different areas. If you are just a beginner real estate investor with limited capital, investing in a large apartment building would increase your risk if the local housing market were to decline. As a result, the value of your rental investment can decline steeply. While doing thorough market research before investing in apartment buildings can mitigate the risk, it’s impossible to predict the future.
4. They Are Good for Learning
If you have little or no experience with apartment investments, small multifamily properties can be a great learning tool. Before you take a deeper dive into larger multifamily real estate, buying a 2-4 unit multifamily property can provide you with the necessary experience. You will be in a better position to handle larger apartment buildings without getting overwhelmed. In case you make a costly mistake, you won’t lose as much as you would by investing in apartment buildings.
5. Less Risk of COVID-19 Transmission
If you live in a large apartment building, you have probably experienced more stringent measures to curb the spread of COVID-19 than your friends who live in single-family homes or small multi-unit properties. This is because residents in large apartment buildings have an increased risk of exposure. They have more common areas like elevators, gyms, parking lots, etc. However, small multifamily homes typically have separate entrances and fewer or no common areas. So there’s less chance of spreading the virus. If one tenant tests positive, it would also be much easier to control the spread of the coronavirus.
6. Allows for House Hacking
One major advantage of investing in small multifamily homes is the ability to house hack. House hacking means that you live in one unit and rent out the other units to generate rental income. It’s possible for this income to cover your mortgage expenses and other property expenses so that you are essentially living for free. You can reduce or even completely eliminate your housing expenses. Most importantly, with this owner-occupied multifamily strategy, you can qualify for an FHA loan which has a lower down payment and lower interest rates.
However, lenders typically only offer low down payment financing for house hacking with small multifamily homes of less than 5 units. Therefore, if you want to take advantage of this opportunity, investing in a small multifamily property would be ideal since you can’t house hack large apartment buildings.
Searching for Small Multifamily Homes with Mashvisor
If the idea of investing in small multifamily real estate appeals to you, one of the best ways to search for these properties on your own is to use Mashvisor’s tools. Whether you are looking for a duplex for sale, a triplex for sale, or a fourplex for sale, Mashvisor has got you covered.
Mashvisor’s Property Finder allows you to easily search for small multifamily homes for sale in the US housing market that meet your criteria and preferences. With Mashvisor’s multifamily investment calculator, you can perform a comprehensive investment property analysis in a matter of minutes.
The Bottom Line
It’s well known that investing in apartment buildings can be a lucrative move. However, investing in small multifamily properties brings about unique benefits for real estate investors that may not be available with larger apartment buildings. Whether you want to gain some experience first before investing in larger apartments or want fewer management responsibilities, all your financial goals are within reach when you invest in small multifamily homes.