To explain the term in a nutshell, a multifamily residence is a type of residential property that is designed with 4 or more units. The definition can be pretty wide at times. Condominiums, apartment complexes, and semi-communal residences usually fall under the category of multifamily residential properties. Multifamily residences tend to be much more common the closer you get to a big city.
The world of investments, in general, has its risks and perks but real estate seems to be lower risk than others. Owning real estate is always a smart move to diversify an investment portfolio and receive monthly returns. Multifamily properties can push risks even lower and with the right strategies, provide nice profits. There are several key reasons to invest in multifamily residences as opposed to single family residences.
Most of the time purchasing a multi-family residence is more expensive than purchasing a single-family residence. While there are many variables involved such as location and size of the property, this is almost always the case. According to the Federal Reserve, the average cost of a single-family home is $382,000 as of the 1st quarter of 2022. Multifamily properties tend to average at $1,573,931 and $186,248 per unit.
The entry price for an investor may be higher and require a much higher down payment in comparison to a single family home. Despite this, securing financing from a bank or mortgage lender is usually easier. This is primarily because the income from multifamily residences tends to generate a stronger and more predictable cash flow than single-family residences. As such, the risk for the owner to default is much lower, and lenders usually like lower risks.
Single family homes usually only have one tenant or group of tenants. As an investor, if a single family home has a vacancy it is at an 100% vacancy rate. The same is true if the tenant is late with their monthly rent payment.
Multifamily residences usually have multiple units with many different tenants who aren’t related in any way. As such, if one tenant is late with a rent payment, or one of the units is vacant the consequences are less dire. This alleviates risks for property investors and the more units the multifamily has, the more streams of revenue. The larger the amount of units and tenants, the lower risk it presents to the property owner.
There are usually multiple tax benefits in the United States with multifamily properties. Investors can also use property depreciation, maintenance, repair fees, property management fees, insurance premiums, and even marketing costs during tax season.
The best part is that you can use all of the tax benefits above even when the property’s fair market value is rising. Just be sure to have a talented and qualified accountant to make the most out of it.
Easier to Grow
It is much easier to grow a real estate investment portfolio using multifamily properties. Due to the steadier cashflow expanding and purchasing more rental properties is generally easier. The investor or owner will also typically have more collateral to offer to lenders. As such, with clever financing, they can grow an investment portfolio much quicker.
International investors tend to need a property manager as they are not physically close to the property. For some it makes more sense to hire one property manager to look after several units in a multifamily property. The property manager will take care of day-to-day affairs and management. They will screen tenants for you, pick up rent checks and deal with the sometimes ugly process of evictions.
Having one property manager for multiple units just tends to make more sense from a managerial point of view. That and the owner can usually write off the expense in their tax bill.
Owning a multifamily property with many different units in the same place makes management easy. It is much simpler than owning a portfolio of single family properties that are all located in different areas. This can save an investor or property owner time, stress, and at times even cash.
Single Family vs Multifamily Residences
There are benefits to both types of properties for investors. While there may be some drawbacks for multifamily properties, such as the higher entry price initially and much more competition in a hot real estate market. Multifamily properties also tend to need more attention and management skills.
As a property manager is generally needed for multifamily properties, it could be more suitable for international investors. Whether it is a single family or multifamily property, the basic law of real estate remains the same. It’s all about location.