Investing in real estate is difficult, but investing in multifamily home real estate is a completely different aspect. Multifamily real estate investors must not only invest in property that is considerably more expensive than single-family real estate properties, but they will have to consider the needs of many individuals.
Continue reading this guide to further understand multifamily real estate properties and important aspects of multifamily real estate investing.
Types of Multifamily Real Estate Properties
Single-family real estate properties are straightforward, you only own a property that is rented out or sold to a single-family entity. Multifamily properties are rented out or sold to multiple family entities.
The different types of multifamily real estate properties include:
- Duplex — A single building with two separate entrances and two individual dwellings with no common area in the building.
- Triplex — These are similar to a duplex, these are a single building with more than one entrance and dwelling. These include townhouses which are large buildings with multiple housing units side by side.
- Apartments/Condo — These housing units are usually in large buildings and are rented out/purchased individually.
Now that we know the different types of multifamily properties you can invest in, let’s move on to their costs.
Costs of Multifamily Real Estate
Each of these multifamily real estate investments has different characteristics and advantages.
The average costs for different types of multifamily real estate properties include:
- Duplex — $388,000
- Townhouse Complex — $166,500 per unit
- Apartment Building — $201,978 per unit
However, these properties can be found in various areas. For instance, apartments and townhouses are more commonly found in urban settings while duplexes are more common in suburban settings.
While the average multifamily real estate property is more costly than many single-family real estate properties, there are many advantages to owning multifamily properties.
Advantages of Multifamily Real Estate
There are many advantages to multifamily real estate investing. Some of these advantages include:
- Larger portfolio with one property
- Higher returns of investment
- Lower risk
- Better chance of financing
- Easier insurance
- Tax benefits
- Better property management opportunities
If you are interested in making money, multifamily real estate is a solid investment.
While a multifamily property is technically only one investment, it has the potential to provide multiple streams of income. You can buy the property and charge multiple rents at a single time. This is especially helpful if you have a property with multiple different types of units from studio to 3 bedrooms.
Higher Returns of Investment
Generally, multifamily real estate investments provide higher rates of return in investment than any other type of real estate property. According to CBRE, they average 9.75% annual return, which is even larger than single-family real estate properties.
Single-family properties could be sold or rented out to a single family. The problem with single-family properties is that if no one is currently residing in your property, you are not making any rent or any other source of income. Even worse, real estate properties require high fees for maintenance, taxes, and insurance.
Using a multifamily real estate investment will create multiple potential sources of income from multiple tenants. Even if you lose one tenant, you can still receive some rent from others and still have an income.
Multifamily properties are less risky than single-family properties, but recent economic crises including the 2008 Recession and the 2020 crisis proved troublesome to many multifamily property owners. However, having multiple units allows property owners to be flexible in how they utilize them.
Some units could be sold when people are turning to own homes, but if rentals are more popular, multifamily real estate can be rented out. This allows you to have a return of investment during economic bear and bull markets.
There is a misconception that multifamily properties are sure to appreciate. Multifamily properties will always have risks, but over the long-term, these investments are more likely to appreciate than single-family properties.
Better Chance of Financing
Multifamily real estate properties are more expensive than single-family real estate properties. However, they tend to have higher rates of return and less risk than single-family properties. Generally, lenders and investors are more open to provide financing to multifamily real estate.
Another great perk that we provide our ADPI members is access to our in-house lending team. The team, provided by AmNet, is in most US states and are a great resource for not only single family loans– but their expertise includes multifamily, commercial lending, VA loans, hard money, and private lending. You can get connected with a loan officer here: https://www.activedutypassiveincome.com/find-agent-or-lender/
Multifamily property insurance may need to accommodate more people than a single-family property. It will be slightly more complicated than most single-family properties. However, a multifamily real estate property is still a single property that requires only one policy.
While the needs of the individual units are different, a single blanket policy could suffice to cover your multifamily property.
Multifamily real estate properties are among the most tax-advantaged investments. You can deduct many things from taxes when it comes to multifamily real estate investment.
Tax benefits for multifamily real estate include:
- Mortgage interest
- Value depreciation
- Management costs
- Maintenance and repair
- Marketing and sales
Now that you’ve seen the different benefits for tax, let’s move on to
No Capital Gains Tax
Multifamily property investors can swap units with no capital gains tax, but it must meet some certain criteria:
- The property must be of equal or greater value
- It must be only for business purposes
- They must be similar
You can even receive the advantage of taxing your profits as passive income in lieu of normal income. Passive income and capital gains tax rates are lower than federal income tax rates. One of the only requirements is that you need to put fewer than 500 hours into managing your investment.
Better Property Management Opportunities
Multifamily real estate properties usually provide higher income. With higher income and more units providing consistent income, multifamily property owners can more easily afford property management.
In addition, multifamily properties can be both owned and occupied by the owner while renting or selling the other unit(s) to other people. If the owner is a landlord, this will make managing the property much easier.
Disadvantages of Multifamily Real Estate
Multifamily real estate investing is full of advantages, however, there are many disadvantages for multifamily real estate. These disadvantages include:
- More costly
- Less available
- For more experienced investors
- Intense management needs
Let’s take a look at each of them below.
Since multifamily properties are generally larger and have more units than single-family properties, they will likely cost more money. Even though multifamily properties can generate more income, this will still be a very large barrier for many investors.
Many investors can travel through neighborhoods and see multiple single-family properties. It is rarer to find multifamily properties in practically every residential area, and few of these properties may be on sale.
For More Experienced Investors
Multifamily properties are different from single-family properties. They will cost more and there will be a lower supply. In addition, they are large income-producing investments. This will mean that many investors will be looking to buy these investments.
In addition, multifamily property investing has a list of different rules than single-family property investing. Some of these rules are local ordinances that every multifamily property owner must become familiar with.
That being said, Active Duty Passive Income has the perfect educational opportunity for investors to learn about investing in multifamily properties. The Military Multifamily Academy is the ultimate resource to give you the foundation you need to get started!
Intense Management Needs
While a multifamily property may have multiple units, these units are all part of the same building. That will mean investors will not only need to manage the maintenance and repairs of multiple units, but that a single need for repairs could put every unit at risk of failure.
This is especially the case for landlords who live on the property. Some multifamily properties may be managed personally, however, very large properties with multiple units may require a property manager.
How Can I Invest in Multifamily Housing?
There are three main ways to invest in multifamily housing:
- Invest directly in the property
- Use crowdfunding
- Buy a residential REIT
Each way has its advantages.
The most straightforward way to invest in multifamily real estate is to buy the property directly. This is very expensive, and you will take on all the risks. However, investing directly leaves out any additional legal matters in an endeavor that is already full of legal matters.
Crowdfunding is a way to invest in larger and potentially more expensive properties while having less than ideal capital to invest in the property. You can obtain money from one to hundreds of investors to cover the rest of the capital needed for investment.
However, this is still high-risk investing. There are many platforms used for crowdfunding multifamily real estate and each can serve a specific niche and invest in specific properties.
Buy a Residential REIT
REITs are much like crowdfunding. It is much like a stock, you can easily and less expensively purchase a share of a company that invests in real estate. They are required to take 90% of their profits to give to investors. However, these investments can swing to general markets like many investment funds and REITS are more moderately risked for more moderate rewards.
Strategies to Consider Before You Invest
Before you start in multifamily real estate investing you must decide on how you want to make money while investing.
There are multiple strategies to profit from multifamily real estate investing:
Each of these strategies can be helpful depending on the individual investor and the property.
The core concept of the value-add strategy is to add value to the property to increase the potential market.
There are many steps to try to add value which is summarized with the acronym BRRRR:
Let’s take a look at each of these below.
Sometimes investors do not even need to change the property. For instance, you can find creative ways to market your property. These strategies include:
- Improved residential operations
- Debt structures that could benefit you and your clients
- Improved marketing and leasing
- Restructuring of client-base.
Sometimes a property already has value and can produce returns on your investment with a little change in strategy.
Even the most well-maintained properties require a little rehab. These types of rehabilitations should generally add value. You should determine how much rehabilitation you are willing to undergo and consider rehabilitations in your budget.
For instance, you can spend more on a property that requires only a coat of paint, but you should spend less on a property that requires new floorboards.
Renting should be used as a form of achieving income. The idea is to obtain income from rent as soon as you can. When you have a steady set of clients, you may be able to raise the rent.
After you have established your property as renovated and as a source of income, it is time to refinance your property. Sometimes you can capitalize on more than you invested.
After you have refinanced your property, you can use that money to try to grow your real estate portfolio.
With a well-implemented strategy and patience, the value-add strategy to multifamily property investing is a sound way to build a real estate investment portfolio.
The concept of the core strategy is almost the opposite of value-add. You do not take a large risk on a property that has little if any development. Instead, you invest in a property that is mostly developed and ready to produce cash flow.
This strategy is low risk and low reward though. You cannot expect too large of gains on your investment.
There are many variations of the core strategy including:
- Core plus
- Stabilized assets
- Trophy assets
Let’s take a look at each of these below.
Core plus are properties that require either:
- Mild renovations
- Improved vacancy
- Other strategies which may require little change in the property.
There is a chance you can make higher returns in investment than using core plus than the low-risk core strategy properties.
Stabilized assets not only have few if even any necessary renovations. They have inhabitants. There is little chance of capital gains and investors look for these for low-risk investments.
Trophy assets are essentially a subclass of stabilized assets. These assets are prized real estate assets that are easily recognized by not only residents and even by those outside of the local area.
These can include skyline properties or well-recognized properties. These should be used for long-term appreciation.
How to Get Started in Multifamily Real Estate Investing
Multifamily real estate can be very difficult, and you must plan for investing. You must:
- Establish a budget
- Research the local area for the residency
- Assemble your business
Let’s look at each of these below.
Establish a Budget
Before you start on multifamily real estate, you need to establish exactly what the maximum you can invest should be. After that, take into consideration how much you will need for repairs and management. This will lower exactly how much you should spend. Having a realistic budget will help you to get started.
Generally, the 50% rule should be followed. You should expect at least 50% of your gross income to go for expenses.
Research the Local Area for the Residency
Every area is different, real estate is about location, location, location.
Where you buy property matters because you cannot move your property. Local businesses and transportation could easily affect the value of your property. These attributes may determine if you should use a short-term flipping or long-term holding strategy.
In addition, the area will determine who you will sell, or rent out your units to. If there are good schools in the area, you may want to market to young families. If your neighborhood has amenities that appeal to older residents you may want to market your property to senior residents.
Assemble Your Business
You must treat real estate investing like it is a business. It is very rare to go out and handle real estate on your own. You need to have a team assembled to handle your real estate.
For instance, you could need contractors and property management to handle your property and the repairs and maintenance. Even if you have expertise in contracting and property management, it is very unlikely that you are also an accounting and legal expert. You should always hire outsourcing for accounting and legal advice.
This is especially crucial near the beginning. Having at least some accounting software will help you minimize your overhead by lowering your tax burden. There may be some items you did not think could be written off as a tax deduction. Having a lawyer on standby to consult and handle certain legal matters outside of court will save you a significant amount of money.
How to Manage Your Multifamily Properties
Since your property is multifamily, managing it will be entirely different from how to manage a single-family property. One of the main reasons is you will need to embrace that the property will be shared with multiple people.
Some of these people may not get along very well. It is best to establish community rules including noise restrictions and even common access grounds.
You must manage potential tenants. Even one below average tenant could lead to complaints from the other tenants. For this, you should have a series of questions:
- Reasons for moving – Usually, this question is more of an ice breaker. However, it usually is a good sign to hear that your tenants want to get room to have a family or find a new job. That indicates ambition and drive to make money, which means they will be more likely to pay rent.
- Ask for a credit score – Credits scores can show your new tenant has no issues paying money. Even if you cannot require it, you should ask for one.
- Monthly income – A new tenant should have a monthly income anywhere from 2 – 3 times the rent of your property. The more income your potential tenant has, the more likely they will pay you consistently and punctually.
- Previous evictions – If you find out tenants have a previous eviction, you may want to investigate. Some evictions are innocent. However, if someone was evicted for committing crimes and they do something unsafe and they hurt your other tenants, you will be legally liable.
In addition, you need to ensure you have a good relationship with the people on your property. This not only assures your residents that you care, but it will lower turnover rates and make your residents more comfortable with bringing up issues.
Find Out Trends of Expenses and Cash Flow
At the beginning of your investment, you can only estimate your cash flow and expenses. While the 50% rule (as addressed above) is a good rule to follow when you just start to invest, you need to find out more about where you spend and when you receive cash flow.
Finding out these trends can let you know more about when you can try to reinvest your cash flow or prepare for larger bills. For instance, you may have more tenants come in May, but you may have turnover rates during that time. You may have to make some repairs just before winter.
Finding out when your investment will be a source of income, and a sink of income will help you make your investment more valuable. Also, knowing when repairs are more likely to occur will make you more prompt to respond to maintenance requests.
In addition, you should determine how much you should charge. Markets and neighborhoods change constantly, and with that, it will change how much people will pay to live on your property. If the neighborhood and local markets become more valuable, you can charge more. If it becomes less valuable, you may want to change how much you charge accordingly.
Selling Your Multifamily Real Estate Property
While real estate investing is always a grand endeavor, especially in the multifamily realm, that endeavor will likely come to an end. You will probably sell your multifamily property eventually, whether it is to cash in your investment or to retire.
When you start investing in multifamily real estate, you should have an endgame plan. You should determine when and how you should sell your real estate. For instance, do you want to sell your property when it has tenants or when it is generally empty?
In order to sell your multifamily real estate property, you will have to do work that is very similar to the work you did to your property after you buy it in order to raise its value:
- Fix/spruce up units
- Update common areas
- Increase curb appeal
- Check doors, locks, and windows
- Schedule inspection
- Hire agent
- Prepare legal counsel and documents
Now, let’s look into each of these below
Fixing and Sprucing Up Units
Your occupants did at least a little damage to your unit. There is no way to avoid it. Every tenant leaves a little trace. Even a little smoke while cooking food will linger as smells on the walls.
You will need to at least do some extensive cleaning of the units on your property. If you allow pets, expect extensive repairs, maybe even irreversible damage.In addition, you may want to update the unit. At the very least, upgrading appliances will help with the appeal.
Updating Common Area
Like your individual units, you should update your common areas. Updating any of these areas will increase the value and appeal to any future occupants and potential real estate investors.
Even if you do not have a shared terrace for your tenants, chances are there is a shared yard or foyer. These will be among the first areas any future occupants will see.
Speaking of appeal, building curb appeal will make your property much more valuable.
Michigan State did a study showing that improving curb appeal can increase the value of the property by 5-11%. Sometimes, you only need to power wash, paint, or do a little landscaping to make tens of thousands from your investment.
Check Items Meant for Security
A property could look appealing, but if it does not appear safe, there is very little any positive appeal will do to increase the value of your property. If the doors appear unhinged or the windows are broken, you need to fix those.
Improving the security of these items including higher quality fire doors or stronger windows can make investors feel like they are buying a safe investment, not only for themselves, but for future occupants.
Schedule an Inspection
An inspection may seem arbitrary, especially if you have kept up with repairs and are trying to sell your property.
An inspection can help to prevent surprise issues. You can then address those issues. It is better to do that and find problems than to have a potential investor schedule an inspection and find a problem.
At best, you may need to discount your price, at worst, you need to wait for a new potential investor.
Hire an Agent
Selling any property is very stressful, especially when managing the steps needed to increase the property value.
While some properties just sell themselves, it is frequently better to hire an agent. It may cost some of your returns on investment, but they will sell your property faster and maybe for a higher price.
Additionally, ADPI has an incredible real estate agent network that can assist you with finding the right agent. We vet and interview potential agents to find the best fit for our members. You’ll be in great hands and you can start the process here.
Prepare Legal Counsel and Documents
Any change of ownership when it comes to real estate requires lawyers. They ensure the documents are well prepared for the sale. However, legal counsel will also review documents you have including leases and your mortgage to determine if you have any hurdles to overcome before you sell.
Multifamily real estate is a very hard endeavor to accomplish. However, composing a strategy will help you succeed. While this guide is a great first step to finding out how to invest in multifamily real estate, you should also consult experts and network before you begin your next steps to grow your wealth.