The Basics
Multifamily real estate investing is a popular choice for beginner investors because many investors have either lived in or bought a single or multi-family home in the past and are familiar with the basic workings of the property.
Multifamily properties consist of 2 or more units with the smallest type being a 2 unit property, called a duplex. Typically, their financing resembles that of single family homes, which is another reason why beginner investors are more comfortable with the process. Similarly, triplexes and fourplexes have 3 and 4 units respectively.
Properties that exceed 4 units are generally considered commercial properties and have different financing protocols.
These properties are easy to understand because each unit is recognizable and familiar. Most units are a combination of bedroom(s), bathroom(s), living space(s), and a kitchen. Usually rental units run on month-to-month or annual leases and the paperwork is usually streamlined, straightforward, and easy to understand.
Fans of multifamily investing rightfully claim that it’s a great fit for anyone who wants to increase their income and learn the basics of real estate investing. Some investors choose to live in their properties, known as owner-occupied properties.
Multifamily properties are overall known for being great opportunities for those looking to build their wealth.
Why Beginner Investors Love Multi-Family Home Investments
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They Are Stable Investments
If you think about it, regardless of where the economy is, people need a place to live. Residential properties, especially smaller more affordable options like multifamily are relatively stable, even when the markets are down.
- Great Opportunities for Passive Investing
Making a profit from rental income generally means you do not need to actively work for more income on your property, beyond some repairs or renovations that may come up. Many opt for hiring a property manager that can help them with the day-to-day management so their rental income is truly passive.
- Cheaper Insurance & Fewer Loans
Multifamily properties are similar to single family homes in that they can usually be purchased with one traditional bank loan. That means it limits confusion for first-time investors and makes the purchase a faster transaction. Similarly, insurance is also similar with multifamily properties. Insurance companies are more experienced with multifamily properties, making it easier to get an investor-friendly and timely policy. And as you add multifamily properties to your portfolio, it will be easier for the same provider to use a single “blanket” policy, making it easier for you as an investor.
These properties overall feature lower interest rates and higher loan-to-value ratios, making them more affordable than multifamily homes. Investors can also opt out of a loan and offer a cash payment. Please note, however, that the interest rate for those intending on collecting rental income is on average .25% to .5% higher than for those who are getting an owner-occupied mortgage.
- Lower Taxes
One of the most popular reasons investors choose to start with Multifamily real estate properties is how tax-advantaged they are. Specifically, investors usually use a mortgage to finance their real estate properties and they can get a deduction for the mortgage interest to be paid the first fiscal year. This way, Multifamily properties can be depreciated over a 25-30 year period, even if the property’s value appreciates. The depreciation can be used to offset part of the annual rental income, which makes it very appealing to investors who want a safer and more stable asset as part of their portfolio.
Tips for Investing
- Understand Your Income and Understand Your Expenses
Knowing how much you can make from regular rent payments is not enough to gauge your potential profit. There are a variety of factors you need to consider when determining if a property is worth it. Of course, you’ll make the money from rent but on top of that, there may be other expenses including repairs.
- Location, Location, Location
One of the most important parts of researching real estate properties is where it is. A potential renter starts their search for housing availability based on zip code. Knowing the pros and cons of a property’s location and why someone should live there is crucial. One of the main selling points for potential investors is the conveniences your building’s address offers: distance to the nearest train station, nearby grocery stores, neighborhood safety and more.
- Decide How Hands On You Want to Be
We’ve established that location is important. But other than just how convenient a location is for your potential clients, you should also consider how convenient that location is for you. If you want to be more involved in the daily operations of your property, choosing one that is close to you may be advantageous. On the other hand, if you want to invest in a new property somewhere further, you can look into outsourcing options for more of the upkeep and administrative tasks.
many individual leases, different tenants who have various repair and maintenance requests, tenants who prefer to communicate in different ways, pay their bills differently, etc.
Make it Easier
- Find a Property Manager
Managing your property yourself may not be the best move, especially as a beginner investor. The day-to-day operational tasks on top of your other responsibilities at work and with family, will pile up. A property management company can be the third party that makes your investment seamless. By delegating the daily tasks, like renovations, repair requests, etc. you can reap the benefits of being a property owner without the stress.
Even though Multifamily properties are beginner friendly investments, there is still a great deal of work needed to keep up with them. You’re often dealing with a large number of leases, different leases with different rates and provisions, a variety of repair and maintenance requests, and tenants with different styles of communicating and paying their rent, all at once.
- Live In Your Property
One way to become more familiar with your property and understand the day-to-day issues that can come up is to actually live in one of your units. Some property owners choose to do this so they can be up-to-date with what’s happening on their property and be able to market more effectively. Although you would not be collecting rent for the unit you’re occupying, you can develop relationships with your other tenants, learn about the area, and be onsite for any emergencies or time-sensitive issues.
All in all, Multifamily real estate investing is one of the best ways to get started in real estate investing and building passive income.
To learn more, here are some more articles to help you get started with your investment journey.
For more information on investing, specifically how much money you want to spend and what a realistic investment looks like for you, try out free and easy-to-use Cap Rate calculator here.
You can also check out this resource on how a a Property Management Company can streamline your investing as a multi-family property owner.
If you’re ready to get started with your investment, contact our office and we’ll get back to you as soon as possible.
