Owning a collection of rental properties is arguably one of the most popular ways to invest in real estate.
Properties with only a single residential unit are commonly referred to as single-family properties, while those with multiple rental units are referred to as multi-family properties.
Multi-family properties are a staple asset among real estate investors for a couple of reasons.
One, they have minimal complexity with regard to maintenance or ownership.
Two, they provide added stability compared to other asset classes like retail or office as they are more resilient to economic cycles.
And thirdly, securing financing is relatively easy. It’s due to these reasons that make many single family investors graduate to investing in multi-family properties as their next level.
But are multi-family properties right for everyone?
Of course not! Like any other investment, there are advantages and disadvantages to multi-family investing over single-family investing.
So, in this article, we’re going to share with you the pros and cons of multi-family investing.
Pros of Buying A Multi-family Real Estate
1. Cash Flow
Obviously, the more rental units you have, the more cash flow there will be. Imagine charging rent to one tenant, then doubling, tripling, and even quadrupling that number. That is a lot of profit.
2. Long-term Value
Single-family homes and multi-family homes are priced differently. Pricing for single-family homes can be subjective and fluctuate a lot. This is because their pricing is based on what families find appealing.
Pricing for multi-family properties, on the other hand, is almost exclusively based on their cash flow potential. As such, in many cases, multi-family real estate investing is more stable than single-family investing.
3. Less Competition
Single-family homes are an easy entry to the real estate investing realm. Not only that, there are also many other people searching for a home. Thus, you are most likely to face stiff competition when buying or renting them.
This is not the case when it comes buying multi-family property. Multi-family units have far less competition. This is because the only competition is from other investors and not against tens of thousands of others looking to buy a home.
4. Risk Mitigation
When buying a multi-family home, the risk for a total vacancy is low. This is because you will be dealing with several tenants as opposed to just one with a single-family home.
Even if one tenant vacates your property, you’ll still be left with others to maintain your cash flow. Additionally, the likelihood that you’ll have multiple tenants moving out at the same time is quite unlikely.
5. Insurance Simplicity
When you buy a multi-family home for investment, you’ll only need to open up one policy. This will give you the same coverage across each individual unit. While it’s going to be more expensive, you’re only going to deal with only one insurance policy.
6. Loan Simplicity
Ever tried to manage multiple mortgages at once? If so, then you know that dealing with multiple lenders and multiple loans can be a headache.
With multi-family real estate investing, you are going to deal with a lot less paperwork than you would if you bought a single-family property. Multi-family homes are ideal if simplicity and convenience are your goals.
7. Tax Breaks
Aside from earning rental income, multi-family rental properties also allow you to enjoy a number of tax benefits. You are able to deduct the cost of expenses related to owning a multi-family home.
Another tax benefit of owning a multi-family property is the ability to deduct any credit card interest or interest from a loan. So long as the funds were used for a function related to the property.
You may also deduct depreciation of the property from your taxable income.
Okay, up to this point, investing in multi-family homes sounds quite terrific. But do they have a downside? Let us find out.
Cons of Buying a Multi-family Property
This is pretty obvious. In fact, prices can be a real barrier to entry. Multi-family homes are not only expensive to buy, but they are also more expensive to maintain.
If you are a beginner, or if you are low on cash, then you should probably consider investing in single-family homes first.
2. Stricter Regulations
Multi-family homes must comply with a dizzying array of regulations that cover nearly every facet of the building.
Before investing in this type of property, do your research and familiarize yourself with these laws. The rental laws vary state by state so make sure you do research depending on the location of your investment.
3. Low Availability
Your options are going to be limited when searching for the “ideal” multi-family units. This is because multi-family properties are less common and tend to be less available compared to single-family homes.
4. More Complications
With multi-family real estate, you are dealing with multiple moving parts rather than just two or three. Multi-family properties are also prone to strange occurrences. For example, one noisy renter may cause all your renters in other units to suffer.
Also, if there is a structural problem, the value of your property could go down significantly.
5. Savvy Competition
In the section preceding this, we mentioned the fact that you’ll have less competition when buying a multi-family home than a single-family home. However, the little competition you’ll have will be from far more experienced folks.
6. Management Time
Each additional investment unit translates to more management responsibilities. And, the more the responsibilities you’ll have, the more time you’ll spend as a landlord. So if you have a busy schedule, hiring a property management company may be a wise decision.
So, should you or should you not invest in a multi-family property?
Unfortunately, the answer isn’t that straightforward. You have to weigh in your options and make the best decision based on what makes the most sense to you.
When done right, multi-family properties, as many can attest, can be quite profitable. They are also more challenging, however. Again, before investing, base your decision on what makes the most sense to you after weighing these pros and cons.