Why Invest in Multifamily Real Estate?
Multifamily real estate refers to properties that house more than one household in a single complex or building at the same time. These range from smaller apartments with several units to high-rise complexes with hundreds of units. While not as common as single-family houses, multifamily real estate makes up a significant segment of the US residential real estate investment market.
Although all real estate investments carry an element of risk, the multifamily property asset class is considered one of the least risky within this asset class. This is partly because it provides a service that underpins the nation’s economy and is therefore quite stable economically.
People will always need affordable and comfortable housing located near their places of work and social amenities (such as schools). In comparison, commercial real estate such as office buildings and retail properties is much more prone to economic shocks and market volatility.
Based on a per-unit basis and compared to other kinds of real estate assets, the construction cost of a multifamily property is more affordable. It’s possible to complete construction on a unit-by-unit basis, unlike a shopping mall or office block, which must be completed in full before tenants can move in. In addition, mortgage loans to buy or build multifamily properties can be lower than for other properties.
Multifamily housing reduces risks for the investor in other ways. For example, if one household falls behind on their rent or gets evicted, this doesn’t affect all the other residents, who keep on paying. The same principle applies to other potential multifamily property problems that might arise, such as tenant disputes, property damage, and maintenance issues.
In addition, compared to single-family units, the foreclosure rate on multifamily properties such as apartment buildings is relatively low. This might explain why mortgage lenders often offer competitive rates for people seeking to invest in this category of property. This reduces the asset’s operating costs and may mean more revenue in the long run.
In addition, if managed correctly, multifamily properties may be easier to maintain. Since multifamily buildings can be managed by a single property management company, issues that arise can be settled faster. And since all units are in one location or general area, responding to tenant repair and maintenance requests can be less time-consuming and may require fewer workers. In cases where external contractors are required, volume and preventative maintenance contracts may come with lower per service rates.
Managing multifamily properties can also be logistically easier. For example, it is much easier to manage multiple units under one roof than several different rental units that are spread throughout the area. A multifamily property also makes more financial sense when it comes to hiring a property management company. With a single rental unit or property, hiring a property manager might not be prudent. With a multifamily property, on the other hand, it’s possible to optimize the services of a property manager.
From a tax perspective, investing in real estate, and particularly multifamily properties, comes with a range of benefits. These include capital gains taxes (instead of income taxes), the ability to deduct expenses, and allowances for property depreciation over time.
