Multifamily real estate has continued to grow beyond the norm these past few years. As inventory surged, demand has grown right along with it. Despite signs of the housing market beginning to stabilize, the investment potential of multifamily properties is still tantalizing. With high demand from renters comes high desirability amongst investors.
Whether you’re a seasoned investor, brand new to real estate, or an accidental landlord, it’s important to weigh the investment. Before jumping in, decide if the benefits of such large property investments outweigh the costs. Multifamily properties scale much larger than a single family rental. Everything is larger, including the potential positives and negatives.
So, what are the pros and cons of owning a multifamily investment property? Here are the most common answers.
Pro: Steady Cash Flow
One of the biggest advantages to the investor looking for large ROI potential is the fact that multifamily properties are always going to have a much greater cash flow than single family rental units. These property types can potentially have hundreds of tenants. Each tenant brings another stream of rental income to your pockets.
The large pool of tenants that comes with multifamily real estate also brings stability and diversification to your investment. If a tenant or two vacate a unit, you are still generating revenue on the property from every other unit. The stress from losing money from turnover is cut down when you have a diverse group of tenants leasing your property that create a stable flow of income.
Con: Management Complexity
The scale of a multifamily property also brings more issues to deal with on a day-to-day basis. This means more stress for you as a landlord. A single unit isn’t going to have a need or problem every day or even week. But when you have dozens or even hundreds of units, it becomes a daily job just to keep all of your tenants happy.
This can get very complicated for a landlord very quickly. Maintenance issues can stack up quickly. You can find yourself dealing with a tangled web of contractors and pending maintenance tickets. That’s why so many multifamily property owners hire property managers to help handle daily operations.
Pro: Economies of Scale
Not only do you generate more income through multifamily, you also cut down on costs on a per unit basis. An economy of scale comes into play when bulk purchasing services or supplies for so many units at once. You’ll now have the purchasing power to make per unit deals for management services and maintenance.
Con: Initial Capital Requirement
A larger property is going to take much more capital up front to secure the investment. The sheer size of these properties, the income potential, and the greater rate of appreciation all factor into this. This can scare many smaller investors away from these opportunities, and make it more challenging to secure financing.
Pro: Better Financing Options
If you are a savvy investor when it comes to financing, your options are typically wider and come with better interest rates. Multifamily investors have the opportunity to secure government loans like Freddie Mac and Fannie Mae loans. These loans are designed to aid the housing market. They can help you finance a higher cost property easier and keep your monthly profits higher.
Con: Market Sensitivity
Economic downturns in the rental market are something that affects all property types. You might be even more sensitive to it with a multifamily investment. When rental demand fluctuates, you could see a greater hit to your income when more units are vacant. You are required to stay in touch with local market conditions affecting occupancy to keep yourself above water.
Pro: Appreciation Potential
Every kind of investor loves seeing the value of their investment go up. Luckily, multifamily rental properties are a large investment that appreciates in value very efficiently. This appreciation is influenced by the wide range of rental income and increasing market demand in urban areas. You can also further impact your property appreciation by adding upgrades, renovations, and expanding the property.
Con: Tenant Turnover
While turnover does not cut you off from income completely like it does with a single family rental, it does happen much more frequently with multifamily properties. This means you could be constantly dealing with finding new tenants for vacant units. Turnover is another constant time investment of these properties, which is another sign you might need a property manager to run them.
Pro: Tax Advantages
Taxes are the kryptonite for many property investors. However, tax deductions are a silver lining. With multifamily properties, you have a much higher potential for deductions. Mortgage interest, property depreciation, and operational expenses are all potential deductions come tax season. Make sure you are consulting with a tax professional to maximize your deductions.
Con: Regulatory and Legal Compliance
There is a need for understanding federal, state, and local regulations when running a rental property of any kind. This becomes even more complex and vital when it's multifamily. The more tenants you have, the deeper your understanding of the law must be to make sure nothing falls through the cracks. Not having a dedicated property manager can lead to a greater risk of legal trouble.
Successful Multifamily Property Management
No one person can run a multifamily property on their own. This can be both a pro and a con of this type of real estate investment. It takes a team of professionals as well as a network of contractors to handle specialized maintenance.
Luckily, property management can help. With any investment, you want to make the most of the benefits to generate the most profit possible. A property manager can help you achieve this while also minimizing the impact of any negative aspects.
Axela Management is a property management company with a specialization in multifamily properties. We bring expertise and dedication that can streamline all the necessary processes for your property.
Get a free consultation with us and begin your multifamily real estate journey together with Axela Management.
