Many investors want to take an active role in managing their portfolios. But doing so in the volatile stock market is risky, and they often find themselves managing a dwindling portfolio of stocks. Investing in multi-family real estate properties offers a low-risk method of building a portfolio in which you can actively be involved.
What Is a Multi-family Home?
A multi-family home is a property that is occupied by more than one family under the same roof. It could be as small as a duplex (two units) or as large as a multistory high rise with dozens of units. It could also be an entire apartment complex, but those are generally housed in multiple buildings, so it’s not just one roof.
Reasons for Investing in Multi-family Homes
- Demand for Multi-Family Housing Is Booming
Two different factors are driving demand for multi-family housing. First, millennials, the largest generation in history, are eschewing homeownership in favor of renting. While data from the U.S. Census in 2016 indicates that 64% of the population are homeowners, only about 31 to 45% of millennials (age-adjusted) are homeowners. Secondly, baby boomers are increasingly downsizing into apartments, rather than smaller owned properties. The convenience of living somewhere the maintenance is provided for you appeals to those who have retired and want more freedom to travel, etc.
- Multi-family Investing Makes Financial Sense
While the properties themselves are more expensive than single-family homes, they are significantly easier to finance. This is because the bank knows that the investor will have a positive cash flow from day one of ownership. So basically, that’s why multi-family investing makes so much sense.
- Immediate Positive Cash Flow
Cash flow is the next financial advantage of this type of investing. There is an increased cash flow available from rent payments that will be used to manage the properties. This increased cash flow can also be used to acquire more properties.
- Build Your Portfolio More Rapidly
In turn, this increased cash flow allows you to build your portfolio at a much faster rate than with other investment types. Also, there is less risk involved because you control when and if you acquire more income-producing properties.
- Tax Breaks
You will be able to enjoy significant tax breaks. The government often provides tax incentives to provide housing in certain cities. The type and amount of tax incentives will vary by location and property. However, any incentives you receive are just increased revenue that you can pocket.
- Shorter Term Leases Allow More Frequent Rent Hikes
By setting shorter-term lease agreements (six months to one year), you will be able to enjoy faster rent increases. This is especially helpful when you buy a depressed property and begin making simple improvements that will increase the value of your rentals. If you renovate the property incrementally at first, you can raise the rent on the newly remodeled apartments.
- Multi-family Rentals Are Easier to Manage
Multi-family real estate is easier to manage than a portfolio of single-family homes. Not only are they easier to finance and less expensive to acquire, but they also afford you more flexibility. With single-family homes, if you start with only one or two properties, you could find yourself in a negative cash flow situation quite easily with a vacancy. Vacancies in a multi-family home are less likely to impact the bottom line as you are still receiving rent from the other units, even if one unit is standing empty.
- Multi-family Properties Are Cheaper to Manage
Your maintenance and improvement costs are smaller per unit. This is because any shared features or services are spread out over many tenants, rather than being for a single-family. This results in lower expenses and a higher positive net monthly income. One building with forty units is significantly less expensive to maintain those 40 single-family homes. It is also much easier to update one building than it is 40 buildings.
- You Can Make Property Improvements Incrementally
The increased cash flow from multi-family properties allows you to improve the property incrementally as units are vacated. Rather than having the entire home unavailable for rent when improvements need to be made, only a portion of your building is uninhabitable while work is being done. As residents move out, bring those units up to standard, and improve common areas as they make sense. Common area improvements raise the rental value of all units on the property. Overall, you will have far fewer construction projects with a multi-family property than a comparable portfolio of single-family units.
- Adding Value to Your Investment Is Easy
It is significantly easier to add value to your property. With single-family homes, if you paint the exterior of one home, you do not add value to all the homes in your portfolio. On the other hand, painting the exterior of your multi-family home increases the value of multiple units simultaneously. Not only that, but you can start by buying properties that have multiple inexpensive ways to upgrade the property to increase its value. You can make exterior improvements, like painting, landscaping, parking lot pavement, etc. You can add community amenities like tennis courts, basketball courts, and pools. You can make in-unit upgrades like adding washers and dryers in the units or upgrading the kitchen and bathrooms. Technology provides yet another avenue for upgrades such as security systems, cable TV, and internet services.
- Less Risk
When investing in the stock market, you will need about $50,000 to buy $100,000 of stock on margin. If the stock loses value, this means that you will have to come up with more money to cover your position or your stock will be sold. With real estate investing, you can invest far less money for equivalent value than in the stock market. If the property’s value does drop, it only creates a problem if you try to sell it when the value is low. Thus, you can hang on to the property, collect income, and wait for the value to recover.
- No Capital Gains Tax Unless You Sell
With the stock market, you have to pay taxes on capital gains. Multi-family properties allow you to pay little to no taxes on capital gains because you can reduce your tax burden through depreciation and capital expenditures on property improvements. These capital expenditures are funds that you can use to acquire, upgrade, and maintain a property.
- Higher Potential for Appreciation
Multi-family properties offer a higher potential for appreciation. Make sure that you maintain your property well and offer amenities that will attract ideal tenants. This strategy will allow you to raise rental rates and fill any vacancies fast. Upgrades like security cameras, gates, laundry rooms, and attractive common living spaces such as workout rooms, pools, and rec rooms will make you money in the long run. Keeping your standards high will result in better tenants and improved property value. All of this adds to the overall value of your portfolio and increases your cash flow.
At LCI Realty, we are ready and able to help you start investing in real estate. We pride ourselves on our personalized and professional service. Our realtors are experts at finding properties that can have value added to them with minimal investment. Contact us today and let us start building your portfolio.