What Is Multifamily Real Estate Investing?
As the name suggests, multifamily real estate refers to any property that allows investors to collect income from multiple units in a single property. This type of investing includes duplexes, apartment complexes, and even mixed-use buildings. With enormous potential for growth and long-term stability, it is a smart investment for both seasoned pros and those new to the real estate investment industry.
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Why Multifamily Investing Makes Sense
To be clear, multifamily investing provides long-term returns; it does not work as a get-rich-quick scheme. However, as far as investments go, it presents one of the surest options for seeing solid payoffs over time.
Why? With the cost of owning a home skyrocketing, many people rent instead. Because projections about home ownership costs show that prices will not go down any time soon, the demand for rental properties will remain high for the foreseeable future, providing long-term stability for investors.
Moreover, the ability to own and rent out multiple properties allows investors to diversify and scale their portfolios. The ease of diversification and scaling makes multifamily real estate the perfect choice for beginners and anyone prepared to play the long game.
As with any investment, risks exist, but if you remain patient and view the investment as a long-term strategy, you’ll reap the rewards.
How to Invest in Multifamily Properties
Many people break into multifamily real estate with smaller properties, consisting of two to four units. These properties cost less, require fewer lending hurdles, and are easier to rent out and manage than larger properties. As investors gain more experience, they can grow their portfolio over time and expand to larger buildings as desired.
As with any investment, it’s important to do your homework. You will need to take the following steps to succeed in this endeavor:
- Perform Research: Take time to learn about the real estate market on a national and local scale, including financing options, applicable regulations, and best practices. As you learn, check out our list of excellent books on real estate investing and quality news sites to keep up with industry trends. Network with experienced investors and ask them questions to absorb as much of their expertise as possible.
- Develop Clear Goals: How many buildings do you plan to invest in, where, and how quickly? Think about how much money you want to invest as well as your tolerance for risk. Remember that this type of investment is a marathon, not a sprint, so keep your goals realistic, starting small and building from there.
- Assess Your Financial Situation: Make sure you have enough capital for the transaction as well as any additional costs associated with improving or renovating your property before you can rent it out. Give yourself as much of a cushion as possible because unexpected expenses will absolutely arise.
- Scout Properties: Look at different markets and investigate the demand for rental properties and opportunities for growth and appreciation. Use those goals you set above to guide your decisions as you decide where and how to start your search. If you plan to hold your investments in your home city, that decision will narrow your focus and create a less steep learning curve (you can always grow to other markets later if that fits your plans).
- Manage Your Properties: After purchasing a multifamily property, write up a clear plan for how you will manage it. Will you rely on a company, hire a team of your own, or will you keep track of it all yourself? If you own only a few properties, doing all the work yourself might work out well. But, depending on how many properties you plan to invest in, you might not want or even be able to go it alone.
- Assess and Repeat: Once you close on your first property, assess how it went, make any necessary tweaks to your process, and consider adding additional properties to your portfolio, if you want to continue expanding.
Any real estate purchase is a significant investment, and multifamily units tend to cost more and require improvements before they can be rented out. So, do your due diligence before getting started (for more information, read the in depth multifamility investing guide on BiggerPockets).
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The Benefits of Multifamily Investing
Many investors choose the multifamily path because it offers some great benefits and greater stability than many other investment types. But, what benefits motivate these people to enter this journey?
Multifamily real estate is an excellent way to diversify your portfolio and help you scale your income quickly because you will collect rental income from more than one renter at a single location. The compounded income, in turn, allows you to purchase additional properties to further diversify and scale.
Additionally, investors gain the opportunity for geographic diversification. They can purchase multifamily properties in different markets, insulating them from an economic downturn in one location or the effects of a natural disaster that requires significant and costly repairs.
Owning properties with multiple units also allows you to spread the risk. With multifamily properties, there is a lower risk of 100% vacancy or 100% late rent. For instance, when you rent out a single occupancy property, you collect nothing when that unit sits empty. However, when your property contains two or more units, you can still collect an income when one of the units is empty. Overall, this provides for a more steady cash flow.
Multifamily properties can also provide tax benefits for owners, who can take advantage of deductions on mortgage interest, property tax, and depreciation. They may also be able to write off repairs and improvements, which can reduce the additional tax liability that comes with increased income.
Additionally, multifamily units offer an opportunity for owners to occupy one of the units and rent out the rest. By charging a fair market rent, owners frequently cover the cost of their mortgage and living expenses. This practice is known colloquially as house hacking.
Want to Get into the Real Estate Business? Consider Apartment Locating.
As with any new venture, breaking into the real estate industry can take time. As you explore investment options, consider joining the AptAmigo team and becoming an Apartment Locator or Operations Coordinator. As a real estate agent with a focus on rentals, you’ll learn all the ins and outs of the multifamily business, including more information about market trends. Apply today to explore whether this field is the right fit for you.
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Lori Walker is a freelance writer and content marketer. She writes personal essays, memoir, and poetry in Tulsa, where she lives with her husband and cat, Joan Didion.
