A multifamily rental can be more lucrative than other property types like single-family homes. However, like every other real estate class, it has unique advantages and drawbacks. Before even thinking about multifamily real estate investing, you must first know what you'll be dealing with.
Multifamily Property Benefits
More Rental Income
Since multifamily properties have several units, you will also have multiple tenants. The more multifamily units you have, the more likely you'll have a reliable monthly cash flow. If one tenant fails to pay the monthly rent, you can still rely on others for income.
It's similar to large commercial real estate investments regarding the high purchase price. The advantage to this is getting to collect rent from just multiple tenants, providing steady cash flow. It's a matter of investment strategy and your capacity to manage multiple tenants.
Diversification
Having a multifamily property can be similar to having an investment portfolio. You’re handling multiple housing units, spreading out your investment, and reducing risks. Vacancies with a single unit will have a lower impact on your cash flow, as opposed to a single-family home.
If you plan on diversifying your real estate portfolio anyway, you might as well start by investing in multifamily properties. Just know that purchasing a multifamily property means dealing with more expenses than starting small with a single-family residential property.
Easier to Finance
With single-family properties or commercial real estate, you will only have a single source of income, which might make it harder at the beginning for the rental income to cover anything more than the mortgage payment (if that). While you'll require a bigger down payment for multifamily real estate investing, the yield will also be greater.
Just know that most lenders only loan to multifamily investments that have five or more units. It can depend on various factors like the preference of real estate investors, fair market value, the multifamily market in your area, tax brackets, and more.
Property Management is More Feasible
Hiring a property management company to handle single-family homes doesn't make sense for some landlords, since the property management fees are not worth the amount of work they delegate. With multifamily properties, however, it makes more sense since there are several rentals to oversee.
Not only will you be able to manage your multifamily investments better, but you'll also be earning passive income as you focus on other business opportunities. Some companies like Harland Property Management offer extensive professional services, covering every aspect of your rental business.
Multifamily Property Drawbacks
Higher Initial Investment
Multifamily investing can be expensive, especially for ground-up development projects. You might find it harder to finance your multifamily real estate investment, even if there are plenty of financing options you can consider.
If you don't play the market and manage your property right, you might not get the positive cash flow you need to pay it off. Try to include factors in your decision-making process like mortgage interest, tax benefits, real estate market conditions, and other aspects before purchasing multifamily investment properties.
Maintenance Costs are More Expensive
Multifamily properties require more maintenance since they are usually bigger buildings, and you'll have more tenants. While having many sources of rental income can balance it out, you will need to ensure that you have a low vacancy rate.
By extension, you will also have to think about marketing costs for your multifamily investment. You can use our vacancy loss calculator to determine how it's affecting your cash flow. This will especially be helpful with larger multifamily properties.
Potential Tenant Conflict
Multifamily properties like apartment complexes have dwelling units close to one another, which can result in tenant conflicts due to noise complaints or damages.
Hiring property managers for your multi-family properties will eliminate this issue for the property owner. They achieve this through well-documented screening practices. Something as simple as calling an applicant's previous landlord can save your multi-family property from these circumstances.
Multifamily Rental Property FAQs
What are the different types of multifamily properties?
There are duplexes, triplexes, fourplexes, apartment buildings, condominiums, and townhouses. Each has its pros and cons as well, so it's best to assess each type before you invest in a property.
How much money do I need for an initial investment?
The amount will depend on the multi-family real estate property you intend to buy. Elements that will affect the price include size, location, and condition.
How to calculate potential income for multifamily properties?
Consider factors like local rental rates, occupancy rates, rental demand, operating expenses, and other relevant costs. You'll need this information to determine whether the investment is worth it.
Is a multifamily property considered a risky investment?
All real estate investments are risky if you make decisions without the necessary information. If you're unfamiliar with the industry, you'll benefit from hiring professionals who can conduct research and provide sound advice.
How often should I inspect my multifamily rental?
The average inspection frequency would be around quarterly or semi-annually. While it would be better to do it more often, having more units to check can be tedious. However, you can hire a property manager to do these things.
Should I Hire a Property Manager?
It's a 50/50 decision when it comes to single-family rentals, but it makes sense to hire a property manager to oversee your rental business when you'll be handling more than one tenant. Harland Property Management is among the best options you have in the San Diego area.
Our services allow you to earn passive rental income, minimize risks, and maximize your property's value. You can schedule a free consultation to learn more about the benefits of a property manager.
