Buying a multifamily investment property is a big step for many in this industry, and like any big decision, it comes with benefits and drawbacks. To make sure you’re making the right move by investing in multifamily properties, familiarize yourself with the pros and cons of this investment. But before we list some of those pros and cons, let’s first define what multifamily residential real estate is exactly.
What Are Multifamily Properties?
Basically, a multifamily property is exactly what you’d think it is just by hearing the name. These types of properties contain two or more units in the same building. However, multifamily properties come in many different shapes and sizes. So this can range from a duplex to a small apartment building. Investing in rental properties requires a different strategy depending on the number of rental units you’re planning on investing in. Buying a multi-unit building is considered a big step in the real estate investing business.
The main distinction to take note of when investing in multifamily properties is whether it’s a residential or commercial property. If your multifamily property has two, three, or four units, it is considered residential. Any properties with five or more units are then considered as commercial buildings. The classification of the building makes the most difference when financing a multifamily property (determining its value, taking out a loan, etc.). If you’d like to learn more about the different financing methods available to you when investing in multifamily properties, read Financing a MultiFamily Property: A Beginner Investor’s Guide.
For now, however, we’re going to focus on the pros and cons of investing in multifamily properties in general.
The Pros of Investing in Multifamily Properties
Increased Cash Flow
Probably the most obvious pro is the potential of increased cash flow. This is a big motivator if you’ve invested in rental properties before, but you’re just now buying your first multifamily home. Because you’re renting out multiple units, the real estate investment is generating multiple income streams from the same building at the same time.
Less Risk (Lower Vacancy Rates)
Investing in multifamily properties means less risk when it comes to tenants. This risk is regarding vacancy; because you’ll be housing multiple separate tenants, the risk of complete vacancy is very low. The same can’t be said about single family homes which are deemed totally vacant once a tenant leaves and with them, the rental property’s cash flow. With multifamily properties, you will almost always have some source of cash flow.
Managing multiple loans could be a headache, but investing in multifamily properties comes with the benefit of only taking out one loan, even though there are multiple units. It’s less paperwork and an overall simpler process. If you plan on living in one of the multifamily property units, you can apply for an owner-occupied multifamily mortgage.
Multifamily properties classified as commercial don’t deal with the fluctuation of property value like the single family home market. Investing in multifamily properties typically means having a real estate investment with more stable long-term growth. This is because, with multifamily properties, what matters is the cap rate, which shows the rate of return that’s based on the expected income. They are priced almost exclusively based on how much income-generating potential they have.
Do you have a prospective multifamily investment in mind? Take advantage of all of the pros mentioned above, even if you haven’t started your search yet. Make sure you’re investing smart, and conduct your multifamily real estate investment analysis with Mashvisor before investing. You can search for the best multifamily homes in any neighborhood or city of your choosing with Mashvisor. If you have a free Mashvisor account, you can use our Property Finder to find multifamily property listings that match your criteria in a matter of minutes!
The Cons of Investing in Multifamily Properties
Something you’ll clearly see when searching for multifamily rentals for sale is the higher price point. This makes sense though, especially when you take into account the multiple rental units these buildings hold. Multifamily properties are generally bigger than single family homes so they come at a larger cost. However, when done right, that cost is balanced out with the multiple income streams.
Experience Is Usually Needed
Investing in multifamily properties can be difficult if you’re a beginner going up against the tougher competition. The advantages of multifamily properties draw in savvy highly-experienced property investors (especially when it’s commercial real estate). If you don’t know how to find a good deal and negotiate better terms than them, it can be difficult to find strong investments.
Because you’re dealing with a bigger investment property and more tenants, multifamily property management could prove to be more responsibility than you bargained for. When you look at the duties of being a landlord (rent collection, tenant screening, maintenance, etc.), it becomes more complex. Of course, you can always hire professional management to rid you of that burden, but you’ll need to justify the extra expense so it doesn’t cut into profits.
Investing in multifamily properties is also more complicated from a legal perspective; multifamily properties usually come with more regulations surrounding them. You should do your research before investing in multifamily properties in a certain market. Read up on the laws in that state, or else you could risk facing fines.
Any real estate investment comes with its advantages and disadvantages. If you’re seriously considering a multifamily investment, you need to do it the right way to realize serious financial gains. The things listed above are definitely important points to keep in mind, but there are more; doing your research and due diligence is key. Investing in multifamily properties could be quite a lucrative move. To take advantage of all the pros that come with it, and decrease the effect of the cons, invest with Mashvisor.