Why Multifamily Real Estate Investing Is A Strong Approach To Wealth-Building

Each single-family home relies on one tenant for the entirety of the rental income. If they leave, the home is vacant, and a new tenant must be recruited. No money comes in during the vacancy, pulling cash out of your pocket to cover expenses.

With multifamily properties, the volume and diversity of units subsidize any vacancies and bring the overall vacancy rate down. You receive higher cash flow and passive income with a greater number of units, accelerating the opportunity to scale your investment.

A high unit count also justifies the cost of property management services, which is easily covered by the rental income. Other services and amenities like laundry, parking, storage, event spaces, and more can generate additional rental income.

With lower vacancy rates, they carry less risk to overall profitability. In times of economic uncertainty or a seller’s housing market, multifamily properties are in high demand, offering investment stability and more control over the property’s value. As the market shifts and demand changes, you can alter the rental fees to match, adjusting for inflation.

Securing financing for multifamily properties is often easier than for a single-unit rental property. These investment properties offer built-in opportunities for higher cash flow, reducing the risk to the lender. Residential real estate is still a profitable investment strategy, but multifamily properties expand and diversify your investment portfolio.

• High-Volume Cash Flow: Every occupied unit pays a similar cost for their housing, on average this is between $1,500 to $2,177 per month in most U.S. cities.[3] Multiplied across an entire building or apartment complex, this could easily represent a multi-five or six-figure cash flow number every month, depending on the size of the property.
• Scalable: With such high and consistent cash flow, you can scale your real estate portfolio much faster and reinvest the profits.
• Tax Benefits: Much of the operational expenses of a multifamily property (property management, insurance, repairs, etc.) are tax deductible. Other tax benefits include depreciation deductions, mortgage interest, and other property tax breaks.
• Passive Income: With property managers handling the day-to-day operations, owners and real estate investors can take a step back and collect the income from anywhere.

To calculate the ROI, you evaluate the NOI or net operating income and divide this by the property’s current market value. Another way to determine the ROI of a multifamily property is to calculate the cap rate or capitalization rate. This is how quickly you will recoup your initial investment. The cap rate is the NOI divided by the purchase price. A typical cap rate for this real estate market sector is between 5% and 10%, depending on location and other economic factors.

• Apartment Buildings: These could be individual buildings or a complex of multiple units.
• Duplexes, Triplexes, and Quadruplexes: Smaller properties with two, three, or four connected units qualify as residential properties, not commercial, which impacts the tax benefits you would be eligible for.
• Townhomes and Condos: Townhouses and condominiums are usually larger than apartments but still have shared systems and amenities. They may also be purchased, not only rented.
• Student Housing: Ideal for college towns, student housing is a purpose-built property designed for dorm-style living.

There are three primary classes of commercial real estate properties, each with different values and potential. Class A properties are high-value properties with premium rent potential in desirable locations. Class B properties or workforce housing are mid-value properties with average rent potential. Class C properties are older and often low-income housing units that may require updates and repairs before they can be occupied.

Before considering a multifamily investment property, you must first conduct comprehensive due diligence and market research to determine the viability of your investment.

Your property’s location determines the rent cap and market value and influences the potential vacancy rate. The best places are in high-growth areas with diverse populations across multiple age groups. Look for numerous large-scale employers or a range of industry sectors to be represented.

Larger complexes or multifamily buildings offer greater balance and stability and lower vacancy rates. However, these properties will likely require significantly higher investment capital, more tenant-related responsibilities, and higher property management fees.

Multifamily properties are premium cash-flow properties that generate high amounts of rental income. The higher the unit count, the higher the monthly rental income. With a property management company running the daily operations, this is a jackpot for passive income.

The total rental income minus operating expenses will reveal the net operating income. On average, the expenses should represent no more than 50% of the gross total income. Expenses include property management, maintenance fees, insurance, owner-covered utilities, financing repayment, etc.

If the owner is selling due to poor market conditions, extensive need for repairs, high eviction history, or other negative indicators, the property may prove to be a poor investment. Find out if the property is for sale by owner or bank-owned; different dynamics may be involved, and a different negotiation approach may be necessary.

Our quick-start guide to help multi-family real estate investing for beginners: These are the steps to take and the questions to answer before investing.

• Conduct Detailed Market Research: Get clarity on the local real estate market and the demand for single-family rentals vs. multifamily rental units.
• Run The Numbers: Calculate the income potential vs operating expenses.
• Secure Great Financing: Connect with other multifamily investors, investment managers, private lenders, and real estate agents to secure financing.
• Complete Due Diligence: Learn the property history and vacancy rates and determine any potential renovations. Research other local projects that are in development or newly purchased.
• Secure Premium Property Management: You will rely heavily on this team, so be sure to choose wisely.
• Develop Long-Term Plans: What is your exit strategy? What are your long-term financial goals? How or when do you plan to scale? Develop your long-term investment plans and chart the path to get there.