Due to the combination of low interest rates, economic volatility, and—frankly—COVID-related boredom, many American households have begun considering investing in multi-family properties. According to the Department of Housing and Urban Development, there are about 32.6 million residences that are considered multi-family properties. This accounts for roughly one quarter (24.6 percent) of all households within the United States.
The broad “multi-family housing” category includes many different types of properties, including apartment buildings, condominiums, townhouses, and mixed-use buildings. There are also many different ways in which these properties can be owned—some are owned by one of the residents, others owned by syndicates or large investment firms, and others are owned by several different entities.
Regardless of ownership model, it is clear that multi-family properties play an important role in our society and economy. Investing in one of these properties can be very lucrative, however, you will need to have at least somewhat of an idea of what you are doing and will need to take measures to actively manage your risks.
Does investing in multi-family property ownership currently make sense for you? Below, we will discuss a few of the most commonly cited pros and cons of this unique, revenue-generating asset class.
The Benefits of Investing in Multi-Family Properties
Here are a few of the reasons millions of Americans have decided to directly invest in multi-family property ownership:
Reliable Income: Once you have been able to successfully fill your multi-family property, you can count on that property to be a very regular source of income. Contrary to the stock market—where dividend payments can fluctuate—rents are predetermined meaning that you’ll be able to anticipate exactly how much revenue you can make each month. Best of all, rentals enable you to capitalize on your initial investment without needing to exit your position.
Asset Appreciation: In addition to generate consistent income through rent, you will also be able to build wealth through ongoing asset depreciation. As of 2021, a year that has proven to be particularly lucrative for real estate, the average appreciation rate for residential properties is 14.5 percent per year. Currently, the housing market is outperforming the stock market in terms of appreciation—and this new “bubble”, unlike what we saw in 2008, can be directly attributed to supply and demand forces.
Diversification: one of the best ways to reduce your ongoing exposure to market risk is to diversify the asset classes you are actively invested in. The average American portfolio is heavily positioned towards stocks—though stocks can be great for investing, most stocks tend to move together, meaning that if one is down the others will likely falter as well. Real estate, especially residential real estate, is relatively recession-proof—people will always need a place to live, meaning multi-family property will likely always remain in demand. Investing in multi-family properties can help you diversify your holdings and reduce your exposure to asset-specific risks.
Tax Benefits: Real estate income is taxed as a capital gain, meaning the amount of taxes you pay for your property investment (both rents and appreciation) will likely be much less than what you pay in ordinary income. In other words, $100,000 in real estate income is worth much more than $100,000 in the income you’d make at your day job. As a result, many people have tried to adopt a passive income lifestyle.
Relative Simplicity: all things considered, an investment in residential real estate is usually much simpler than any other investment you could make that would yield comparable levels of income. Your loan (mortgage), your insurance, and other elements of the investment can usually be organized and resolved in just a matter of days.
The Drawbacks of Investing in Multi-Family Properties
Of course, as is the case when making any investment, multi-family property ownership also has a few cons.
Initial Costs: The biggest factor stopping most people from investing in multi-family properties is cost. Unless you have several hundred thousand (or even million) dollars available in cash, you will need to apply for and take out a mortgage—this can be very expensive. Though some developments, such as the growth of real estate syndication, have helped make the market more accessible, ownership will still require a large financial commitment.
Ongoing Expenses: In addition to the initial costs of owning the property, you will also need to pay ongoing expenses. Taxes, utilities, and other expenses will need to be paid regularly, no matter what—this means that if you are unable to rent all of your units, you will be actively losing money with each additional month.
Need for Active Management: Managing a property isn’t always easy. You’ll need to market the property, communicate with tenants, pay for cleaning and upkeep, and manage various other tasks. For many people, property management is more than a full-time job. Though you could avoid these hassles by hiring a property management team, choosing to do so will take a big bite out of your profit margins.
Limited Supply: The housing market is very hot right now, meaning there might not be a lot of great multi-family properties available for you to purchase (or, at the very least, properties that satisfy your current needs). In the rush to become a multi-family property owner, it can be tempting to settle on a property that is less than perfect.
Regulations and Restrictions: Generally speaking, multi-family properties have more building restrictions, codes, and other regulations than their single-family counterparts. One common surprise faced by new multi-family investors is that the changes they had planned are actually not allowed—be sure to check out any rules specific to your area.
The Bottom Line
Investing in multi-family properties can be great—you’ll just need to be careful when making your initial investment. Be sure to do plenty of research, explore various different options, and take the time to understand the responsibilities that come with investing in this unique asset class.