What is a multifamily property?
A multifamily property houses multiple families. Any residential property with more than one housing unit, each with its own kitchen and bathroom, is considered a multifamily property. This is in contrast to single-family homes, which are properties that house one family. Note that the term “family” has broad applications here, to also include couples and groups of roommates.
The most common form of multifamily investment property is an apartment building or complex with multiple units. They can range anywhere from a two-family duplex to a high-rise apartment building with hundreds of units.
6 Benefits of multifamily investment properties
When it comes to investing in real estate, multifamily properties come with considerable benefits.
1. Cash flow
One of the biggest benefits of investing in multifamily real estate is the promise of a reliable monthly cash flow from rental income. While single family homes have only one tenant or group of tenants, multifamily properties have multiple tenants paying rent. If there’s a vacancy in one unit, you’ll still likely have cash flow from other units. But before we invest in multifamily properties, we do our due diligence and come up with an investment strategy.
Given the fair market value of your units, determine whether your rental income will exceed your operating expenses, which will include mortgage payments, insurance, taxes, property management and property maintenance. If the answer is yes, and your property is in a strong rental market where you’ll be able to fill vacancies quickly, you can expect a consistent cash flow.
2. Easier to finance
The fair market value of multifamily homes will almost always be significantly higher than that of single-family homes in the same area, but when it comes to investment properties, it’s also easier to secure financing for multifamily properties. Multifamily properties aren’t as risky for banks because the cash flow for an apartment building is more predictable than that of a single-family rental, so you might be able to shop for lower interest rates.
For example, if you have 50 units and one tenant moves out unexpectedly, your rental income only drops 2 percent until you can turn over the unit. If the same happens in a single-family rental, you would not have any income during a vacancy which poses a greater risk to your lender.
3. Scalable
If you’re looking to expand your investment portfolio, investing in multifamily real estate is a much faster way to grow than single-family rentals (which you would need to acquire one at a time). It also offers the opportunity to move toward commercial real estate investing as larger multifamily properties (those with five or more units) start to fall under commercial real estate, with even greater cash flow opportunities.
4. Tax benefits
Investing in multifamily real estate offers attractive tax benefits. You can deduct maintenance and operation costs, including utilities, property management fees, maintenance and repair expenses, insurance premiums, and any marketing costs.
In the long term, you can also take advantage of real estate depreciation and cost-segregation tax benefits as your building and its appliances age, even if the fair market value of the property is technically rising.
5. Passive income
Investing in real estate in strong real estate markets is a great way to earn passive income. If you hire a property management company to handle maintenance and communication with tenants, you’ll have little day-to-day work to do on your multifamily investment property. This means you have more time to focus on your day job, or your next investment.
6. Simplicity
Compared to commercial real estate investing, or managing multiple single-family rentals, investing in multifamily real estate is relatively straightforward. You’ll be able to purchase multiple units with a single loan (rather than a loan for each single-family home), and insurance companies familiar with multifamily properties will be able to create a policy for you.