5 Benefits of Multifamily Investments
Updated: Feb 3
Multifamily is one of the evergreens and highly profitable avenues of commercial real estate investments. It has the perks of single-family residential properties without only some of its limitations. That’s not to say that investing in multifamily doesn’t have its fair share of cons (because it has,) but usually, the benefits far outweigh the limitations.
That also doesn’t mean that multifamily is inherently superior to residential real estate investing or other commercial real estate options. Every choice has its own merits and demerits, but most importantly, every choice is the perfect fit for some investors, even if it isn’t suitable for others.
That said, there are some clear benefits that multifamily investments have:
Unlike single-family homes, multifamily properties, especially apartment buildings, are relatively more affordable for tenants than single-family homes.
That means you have access to a larger tenant pool. It also makes multifamily properties an investment for every financial “season.” If the economy is down, you can retain your tenants and keep decent vacancy rates up by offering market competitive rent rates. If the economy is booming, you can modify or renovate your multifamily for tenants looking to move as a lifestyle choice, and who are willing to pay a higher rent for high-quality dwellings.
20-unit multifamily will be significantly easier to manage than five, six single-family homes, even if they are side by side or in one neighborhood. Multiple units under one roof mean that you can consolidate your resources and efforts. Instead of running around town, keeping all your properties in shape (or a manager doing that for you at a higher price), you only have to keep one building in shape. Even hiring a dedicated property manager (and help, if needed) usually makes more financial sense with multifamily than a small single-family-homes based portfolio.
Low Vacancy Rate
Vacancies in multifamily properties are easier to absorb.
Two empty units in 20-unit multifamily will be much easier to bear than two vacancies in your portfolio consisting of six single-family-homes, even if they both cost the same. That makes it easier for you to draw the necessary expenses, including mortgage and maintenance costs from rental income. That’s something you can’t do with a high vacancy rate in a single-family-home based portfolio.
Depreciation is typically considered one of the best reasons to invest in a multifamily property. Unlike other properties, depreciation in multifamily can be highly lucrative.
Since land makes up a smaller portion of a multifamily property’s value, there are many things you can depreciate. That ultimately brings down the overall tax obligation.
In many cases, investors enjoy a decent net profit without paying any taxes, thanks to a paper loss of depreciation.
Syndication is much more prevalent in multifamily investments than any other real estate asset class. It’s a smart way to circumvent the high cost of entry in this market, and it also helps investors divide the risk. And syndication doesn’t negate the tax benefit of depreciation or 1031 like-kind exchange.
With these benefits taken into account, multifamily investments might seem much more lucrative than other types of real estate investments. But before diving in, make sure you do your due diligence, research, and figure out whether it’s the best investment for you.
Do you invest in multifamily properties? Let us know why or why not in the comments below.
-Virgil Nethercott, CCIM