by Nadia Abulatif / June 13, 2019
No matter who you ask about a multifamily real estate investment, you will always be told that it’s the best venture you could possibly think of. And this article will lay out all the reasons why a first-time real estate investor should go for one as his/her first investment property without a second thought.
But, before we go further into why you should consider buying multifamily homes for investment, let’s define what multifamily properties are.
A multifamily home is any real estate property that consists of two or more living units. Meaning, it can accommodate several tenants in several separate units. This, in fact, is the major distinction when you compare single family vs multifamily rentals. The first, as the name suggests, consists of one living unit which can accommodate one family/tenant.
Now that you understand what a multifamily real estate investment is, why should you consider this type of investment property when getting started in real estate investing?
#1. Multiple Income Streams
Your end goal for this investment is to make money in real estate. So you need to be concerned about the rental income, cash flow, and return on investment (they are all connected). Since multifamily properties consist of multiple living units, it means that when you rent out the entire property, it will provide rental income from each unit. The higher the rental income, the better the cash flow, and consequently, the rate of return will go up. That is, of course, if you manage to keep your expenses under control (which we’ll talk about in a later section).
However, for this situation to work out perfectly, there are three main aspects you need to consider:
1) Multifamily real estate investment analysis
2) Real estate market analysis
3) Real estate marketing
The first aspect deals with all the return on investment measures you need to examine in order to estimate the investment potential of the property. This process includes cap rate, cash on cash return, and cash flow analysis. The second aspect examines the market and the neighborhood you are looking into. You can do both of these analyses easily and accurately with Mashvisor- a platform designed for beginner real estate investors.
Finally, the third aspect is about figuring out the best way to market your potential investment property for rent. For example, using a rental platform is a smart way to do so. But, of course, the cost factor is important here as well.
#2. Perfect Fit for Creative Real Estate Investing
When investing in property, there is always room to get creative. A multifamily real estate investment is no exception to this rule. In fact, one of the best creative investing strategies that works perfectly for multifamily real estate investing is house hacking. Basically, this real estate investment strategy consists of purchasing a multifamily property, living in one unit and renting out the rest. For example, house hacking a duplex (a two-unit investment property) would be when you live in one unit and rent out the second and use that rental income to repay the mortgage.
#3. Cost Efficient
Part of becoming a multifamily investor is learning about the rental costs (expenses) associated with a multifamily real estate investment. Financing multifamily properties is not the only thing you are going to think about cost-wise. Maintenance, insurance, rental property management, and all other bills must be precisely calculated aside from the property price. We say this because your rental income will depend upon it. The more you manage to reduce the rental expenses, the more cash flow you get to enjoy.
There are many ways a multifamily real estate investment is cost-efficient. First of all, professional rental property management gets cheaper since there are multiple units in the same location. Therefore, property management fees are less. Sure enough, you can always choose to do it yourself which means zero rental management costs, and thus, more cash flow for you. Another example has to do with the common areas. Improving these areas or replacing appliances is cheaper as you can do it once and multiple units/tenants benefit. When you own multiple single family homes, you’d have to pay a lot more to make the same improvements across all properties.
#4. A Multifamily Real Estate Investment Is Easy to Finance
Although a multifamily real estate investment might cost you more to acquire compared to a single family home, it is still easier to finance. Not only is there are a number of financing programs that support this type of investment, but lenders see this property as a lower risk investment due to the higher occupancy rates. Also, you can benefit from programs designed especially for owner-occupied real estate (if you use house hacking). Therefore, as long as you manage your finances properly, funding a multifamily investment won’t be a problem for you.
#5. Grow Your Portfolio
Starting in property investing with a multifamily real estate investment is one of the best ways you can grow your portfolio quickly. After all, the number of rentals is what counts. Once you start with a multi-unit property, the income from the property will be enough to secure your mortgage payments. Furthermore, it will be enough for you to increase your equity in the property and then refinance to purchase more multifamily homes for sale. It is what we call in real estate the snowball effect. Of course, this all depends on how precise you were with your investment property analysis.
We all know that when the economy hits rock bottom, housing costs are the last thing people choose to cut off. People might give up all luxuries and downsize on what they own; they may even sell their homes. In that case, they’ll have to turn to your rental property. Multifamily investments offer the perfect option for tenants who look for more affordable accommodation such as apartment buildings. This means that landlords like you get to benefit from this situation. A thorough examination of the market and the property can help you survive any unforeseen obstacles like this.
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