Investing in a multifamily property may be a crucial financial decision. Rental property is a different investment method compared to commercial real estate. Real estate investors think beyond single-family homes to get a consistent cash flow for a long time. While making any investment decision, knowing the pros and cons of multifamily property investment is essential.
Multifamily property means dealing with multiple units and accommodating numerous families. Multifamily assets include apartment buildings, or small multifamily properties, like duplex homes. You can procure multifamily units individually or leverage other investment mechanisms like a real estate syndication. Your role will be passive - you invest and get consistent profit-share distribution.
This article takes you through the pros and cons of multifamily investment. We intend to help you make informed investment decisions and make consistent profits in the long run. Let's begin with the pros of multifamily investments:
Multifamily Properties Ensure Steady Cash Flow
Real estate investors can participate in a real estate syndication as passive investors for multifamily real estate investing. Though they remain limited partners in the LLC, they can get consistent returns on their investment. Syndicators take care of attracting tenants.
Syndicators may hire property management companies at reasonable property management fees. After deducting property management costs, property upgrade costs, taxes, and other administrative expenses, the overall profit is divided among investors as per the set distribution parameters.
When a multifamily real estate deal is acquired individually, the buyer can earn the rental income as a recurring gain.
Multifamily Real Estate Investing is Less Risky
Multifamily investing is far less risky than commercial real estate or single-family homes. A small multifamily property may go vacant. However, as multifamily homes will be rented away to multiple tenants, complete vacancy is too low.
If a tenant leaves your single-family rental property, you lose the cash flow along with the tenant. Similarly, commercial real estate may be subject to economic downturns. However, you will have some source of income through more tenants occupying your rental units in an apartment building.
Investors can Gain Appreciation During Exit
Investing in multifamily syndication comes with multiple income streams. You earn a steady cash flow through rental income. Additionally, after a sufficient holding period of 5 to 10 years, you get a share in the capital gain when the syndicator decides to sell the property.
Usually, your passive income will be steady if most residential units are occupied. Syndicators sell the multifamily property at a better price to exit. Investors get a share in the profit earned through appreciation.
Multifamily Investing Requires Fewer Loans
Opting for a loan or mortgage for acquiring a multifamily property is straightforward compared to other real estate types and classes. Syndicators don't require multiple loans. They can get one single traditional bank loan for multifamily apartment investing. Simplicity in financing reduces complications and the time needed to close the deal.
Generally, real estate syndicators start capital-raising, and as they accumulate the amount required for the down payment, they close the deal. Then, they opt for the loan and complete the formalities of ownership transfer. The multifamily property will be owned by the LLC, the syndicate. Later, they continue with the capital-raising process till they get adequate funds.
Multifamily Property Investment Brings Tax Benefits
Real estate syndicators can enjoy many benefits by saving taxes after acquiring multifamily properties. To practically obtain tax benefits, syndicators need to include some aspects in their investment strategy.
Syndicators opt for a mortgage to acquire the property. They can claim a deduction in the mortgage interest paid - which is technically more during the first few years. As the loan begins to amortize, syndicators can save on mortgage payments.
Secondly, the multifamily property can be depreciated over 27.5 years. Notably, the property gains appreciation in value with time. Syndicators can use the depreciation to offset the rental income earned every year.
Syndicators can save on taxes on capital gains while selling the property at a better price. Usually, the difference between buying and selling prices is taxed at 15% to 28%. However, a syndicator can reinvest the capital gain to acquire another property within a year. Then, the tax is exempted as per 1031 Exchange Regulations.
Multifamily Apartment Investing is Scalable
Many investors don't prefer multifamily property investment as they feel an apartment building may cost millions. However, real estate syndication brings an opportunity to achieve stable long-term growth for investors. Instead of buying single-family rentals individually, more experienced investors prefer investing in multiple multifamily property deals.
Entry to commercial properties, like shopping malls and hotels, is restricted. However, investors can diversify their real estate portfolio by investing in multifamily properties across locations. Investors can scale their investment portfolios quickly in this property class.
Investing in Multifamily Properties Opens Several Property Types
The real estate industry and particularly the housing market are vast. Though we consider multifamily property as a single property class, investors can invest in several sub-classes.
You can invest in duplexes and triplexes. The federal government eases loans to the owner occupying one home out of a duplex.
Another option can be investing in a residential property with five or more units - designed for students or senior citizens.
For larger multifamily properties like apartments and condos:
A syndicator can pool financial resources from multiple investors, form an LLC, and acquire the property.
Multifamily investments bring enormous opportunities to invest in different product types in the same class.
Acquiring Multifamily Investment Property Requires More Funds
Acquiring multifamily properties on your own will require a massive investment capacity. It may be out of the reach of non-accredited investors looking for opportunities to earn consistent passive income.
Managing Multiple Units Needs Experience and Expertise
Managing multiple rental properties requires experience and expertise. You may hire a property management company. However, that involves an adequate cost as property management fees.
Multifamily Real Estate Investing is a Long-Term Game
Investing in multifamily properties cannot be an overnight huddle or a 'get-rich-quick' scheme. Investors need to wait at least five years to get their investment back. This property class in the real estate market requires a lot of patience and commitment to bring fruits and lucrative financial gains.
The following infographic summarizes the pros and cons of investing in multifamily properties. The graphical illustration will make the concepts easy to understand and remember. Take a look at the infographic to get a quick overview of the benefits and drawbacks of multifamily investment:
The Bottom Line
The article and infographic take you through the pros and cons of investments in multifamily properties. We hope that various aspects of both sides of the coin covered here will help you make informed and wise investment decisions.
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