At a time of high-interest rates and fewer home purchases, many potential homebuyers across the country have decided to push off their big purchase to save money for a down payment and prepare for higher monthly payments. With more potential renters hitting the market, some homeowners with extra cash flow may consider purchasing a multi-family investment property.
According to the National Association of Homebuilders (NAHB) 2019 report, there are 43.9 million multi-family properties across the country. This accounts for 31.4% of all households within the United States. With multi-family properties making up a considerable portion of housing options in the country, potential buyers have many options should they choose to participate in this kind of purchase. Continue reading to learn more about multi-family ownership, including its benefits and drawbacks.
What is a Multi-Family Property?
A multi-family property includes apartment buildings, condominiums, townhouses, and mixed-use buildings. There are various types of property ownership for multi-families: sometimes residents own the property, other times syndicates or large investment firms complete the purchase, and other times several different entities come together to share ownership.
The Pros of Investing in Multi-Family Properties
Multi-family ownership comes with several benefits, proving why so many homeowners across the country decide to participate in this type of transaction. Several pros include:
Reliable Income
Owners who can rent out their property will receive a regular source of income from rental payments. Rental payments come in every month, meaning owners can rely on regular income to offset expenses, pay bills, and generate revenue.
Contrary to the stock market, where dividend payments can fluctuate, you will predetermine the amount you will receive on your rent payments and therefore be able to anticipate precisely how much revenue you can make each month. To ensure a longer duration of determined rental payments, you can negotiate longer leases with tenants.
Asset Appreciation
The property you purchase will likely appreciate over the time you own the residence. According to CoreLogic, homes appreciated 13.5% in 2022 due to continued stress on housing supply and demand. Homebuyers can purchase a multi-family property now and receive a high payout should they sell down the line.
Diversification
One of the best ways to reduce your ongoing exposure to market risk is to diversify your asset classes. The average American portfolio heavily focuses on stocks, increasing their risk exposure. While they 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, mainly residential real estate, is relatively recession-proof as people will always need a place to live. Multi-family property will likely always remain in demand, and investing in this type of property can help you diversify your holdings and reduce your exposure to asset-specific risks.
Tax Benefits
When you pay taxes on a multi-family property, you end up paying less than you would on the same amount of regular income from your day job. In other words, $100,000 in real estate has more value than $100,000 in non-real estate-related income.
Property owners also benefit from the ability to list various expenses on their taxes. You can deduct the cost of repairs, maintenance, and real estate taxes (up to $10,000 for joint filers) from your rental property business.
The Cons of Investing in Multi-Family Properties
If you’re considering purchasing a multi-family property, you should also consider the potential drawbacks:
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 a mortgage. Additionally, you will likely need to deposit a sizeable down payment, which will cost more for a multi-family than a single-family home.
With interest rates at 7%, you will have to consider that you will make sizeable monthly mortgage payments. While rental income from tenants can help offset the cost of mortgage payments, you will have to spend time considering the amount you will charge those who rent your property.
Ongoing Expenses
In addition to the initial costs of owning the property, you will also need to pay ongoing expenses. Homeownership costs like insurance, utilities, and maintenance can add up, even if you do not actively have renters occupying every unit in your residence. Therefore, you must budget for rental vacancies to ensure you still pay your bills on time.
Many property owners can deduct these ongoing expenses come tax season.
Need for Active Management
Managing a property isn’t always easy. You’ll need to complete various tasks like marketing the property, communicating with tenants, and paying for cleaning and upkeep. Depending on the size of the property you purchase and the number of units in your building, you may need assistance in keeping the property up and running. Multi-family owners have several responsibilities depending on where they purchase their property, like staying up to date on laws and regulations in their area, understanding the current market rate for rentals in the area, and networking with professionals in the area like local contractors.
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. Homeowners must therefore decide if they plan to manage the property on their own or hire a person or team to help with the day-to-day tasks. In larger buildings, staff members like supers, porters, and doormen can help add value to the property and alleviate the daily workload.
Limited Supply
Despite a slowing market, supply still does not outpace demand, meaning potential buyers do not have as wide of a selection of inventory as they may have in previous years. Multi-family buyers must consider that they may not end up with their dream property and may need to push off buying for a few months until the right home comes on the market.
Regulations and Restrictions
Those who own multi-family properties must abide by more regulations than single-family homes. Be sure to research the rules in your area, which become more strict as the size of your property increase. New multi-family investors sometimes become surprised when they learn that the renovation they had in mind goes against the local code.
For example, New York City residential buildings that exceed six stories must have window brackets for AC units. While no legislation mandates the landlord apply the brackets, a property owner in the city may choose to adopt this responsibility to ensure they abide by the law and stay competitive against other buildings that may not choose to apply brackets on their own.
Rental Vacancies
Multi-family owners generate revenue by renting out their property, ensuring they can make monthly mortgage payments and afford the other costs of home ownership. However, if your unit cannot rent and you do not fill the empty units in your property, you are still on the hook for all payments.
High turnover can become expensive, as you then have to re-market your property and continue to try and find renters. However, this allows you to update your rental price to accommodate changing market conditions.
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Conclusion
Many Americans purchase multi-family properties as they are valuable assets generating high revenue. If you’re considering making this purchase, be sure to research properties in your area and connect with a trustworthy agent. When you finally take the plunge, advertise your unit to renters to fill vacancies and increase your revenue stream. >
