5 Reasons You Should Be Investing In Multifamily Rentals
Posted by JD Esajian // September 7, 2018
Most investors understand the benefit of a quality rental property. However, as popular as single-family rentals are there is always hesitation making the leap to multifamily rentals. The reality is that in many ways multifamily properties are much safer and offer a higher return than a single-family property. Furthermore, with additional rents coming in there is the opportunity for surplus cash flow as well as higher long-term appreciation potential. Regardless of how you invest or what your niche is, you should consider adding a multifamily rental to your portfolio. Not only will you reap the benefits today, but you will see the impact years down the road. Here are five reasons you should be investing in multifamily rentals.
- Long-term appreciation. With any type of investing it is important to see the long game. Most investors don’t think past their current deal, but six months and six years comes much quicker than we would like. In the blink of an eye then years goes by and you will look back wishing you made better long-term investing decisions. There is no getting around the fact that multifamily properties are unique. In any market single family properties dwarf whatever multi’s are available. If you find a good multifamily you should do whatever you can enhance your investment. By doing so you increase the odds it will appreciate over time. With a single-family property, you are almost capped with how high the value will go. With a multifamily property buyers look more at the rent potential than comparable sales in the area. Nobody knows where the market will go in the long term, but multifamily properties offer you the best chance at long term appreciation.
- Tax benefits. It is no secret that there are tremendous tax benefits associated with home ownership. Your ability to write off mortgage interest payments and closing costs alone make ownership a tempting proposition. With a rental property you accelerate what you can write off. Not only do you still write off the interest payments, but you can include any depreciation, household updates and travel expenses. At the end of the day the tax benefits alone can make owning a rental property profitable. You can break even on a monthly basis and realize a tremendous tax break when you file. Another tax benefit with rental properties is that you don’t have to worry about capital gains. House flipping is great, but there are negative tax consequences you must deal with. With every sale there are capital gains taxes, unless you use the profits to reinvest. With a rental property you can use the positive tax breaks for as long as you own the home. Property taxes are something that you don’t hear investors talk much about, but they are a huge consideration in your portfolio.
- Rent protection. As we mentioned, there is a big disparity between single family property owners and multifamily owners. For whatever reason adding an additional unit, or units, doesn’t appear as safe as an individual unit. The reality is that with each extra unit your investment is more secure. Sure, there is more work and greater amounts of management needed with extra units, but there is also a greater return. With a single-family rental, you essentially have all your eggs in one basket. If your tenant doesn’t pay you have no other rents coming in. You will be forced to cover 100% of the mortgage payment. With a three-family property losing one rent hurts, but you still have two other rents to draw from. Your property fortunes are not tied to one individual tenant. Having other units to lean back on if one tenant doesn’t pay is reassuring and offers the greatest amount of property protection.
- Straightforward speculation. The best investors are those that are most diverse. Sure, you can have a bread and butter niche to fall back on, but you should never put all your eggs in one basket. House flips and rehabs may be something you have been successful with in recent years. As great as the potential returns are there is also a lot that can go wrong if you don’t know what you are doing. With a multifamily property you pretty much know what you are walking into. Instead of worrying about budgets, repair estimates and after repair value you only need to focus on rental items. If the rental numbers make sense you should be confident in your expectations for years to come. There will always be the unexpected house items, but for the most part you will know where you stand.
- Portfolio diversification. A quality multifamily property is almost recession proof. The biggest mistake made by landlords during the mortgage crisis was using their properties like a piggybank. They put minimal down payment into the property and kept pulling cash out whenever the value went up. They also didn’t keep any reserves on hand to deal with tenant vacancies. If managed properly your multifamily property can produce cash flow and appreciate for many years regardless of what the market is doing. You can still do your quick flips and whatever other type of investing you desire, but your multi can be a rock to your portfolio for years to come.
One quality three family property is often easier to manage and has more upside than three individual single-family properties. If you have yet to make the plunge to multifamily properties, the time to start looking is now.