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If you are looking to get into the real estate market, multifamily properties can be a great investment.
But they are by no means perfect for everyone.
In fact, there are a lot of things you need to consider before buying one of these properties.
In this post, I share with you the pros and cons of multifamily properties you need to be aware of before you purchase one.
By understanding both sides of the equation, you can make an informed decision about whether or not this type of investment is right for you.
13 Pros And Cons Of Multi Family Properties
What Is A Multifamily Property?
A multifamily property is a piece of real estate that contains more than one dwelling unit.
This can include anything from an apartment complex to a duplex or even a triplex.
Multifamily properties can be found in both urban and suburban areas, and they come in all shapes and sizes.
For this article, I’ll be focusing mostly on two to four units as opposed to an apartment building.
This is because these smaller multifamily properties are great for new real estate investors to get their toes into rental real estate.
The larger investment opportunities are better served for experienced real estate investors.
7 Pros Of Multifamily Properties
There are many advantages to multifamily real estate.
Here are the ones you need to know.
#1. Can Help You Pay For Mortgage
When you buy a single family home, you have to pay the entire mortgage yourself.
But when you buy a house with multiple units, you can rent out these additional living spaces.
The rental income you earn can be used to offset or even completely pay for your monthly mortgage.
For example, let’s say you buy an investment property that have two units, also called a duplex.
You live in one unit and rent out the other for $1,000 a month.
Your mortgage is $1,500 a month.
With the income you earn from the rental, you only have to pay $500.
You can take your savings and put that towards other financial goals, including purchasing a single family home for you to live in next.
We could even take this one step further.
Let’s say you buy a multifamily property with four units.
You rent three units for $1,000 each and live in the fourth.
In total you make $3,000 income and if your mortgage is $2,500 a month, you live mortgage free.
Plus you have cash flow left over for making repairs.
Understand not all multifamily properties work out this way and are cash flow positive, but many times they are.
#2. Easy To Finance
Compared to single family homes, getting a loan for a multifamily property is easier to qualify for.
Since you can use the rental income as your income, you can qualify for a larger loan.
Of course, you still want to make sure you do your part in obtaining the best loan for you.
This includes checking your credit report and improving your credit score so the interest rate on your mortgage is as low as possible.
#3. Scale To Build Real Estate Portfolio
One powerful benefit to multifamily real estate investing is that it is a great way to build a rental property empire.
Imagine if you bought a duplex after college and your mortgage was only $500 a month because of the rental income.
You live here for 3 years, aggressively saving your money.
After 3 years, you buy another multi dwelling unit, this one with three units.
You move into one and rent the other units out.
In this case, the other two units cover the entire mortgage on the building.
And since you moved out of the unit in your duplex, you rent this out and now that mortgage is fully covered.
You now are not making any mortgage payments with your own money and have two properties.
Rinse and repeat a few more times.
Eventually, you will buy a single family home to live in so you have your own space, but over time as the mortgages are paid off on your rental properties, you can use this income to cover your mortgage.
In the end, you could have close to $10,000 in monthly income from your multifamily property investment.
#4. Easier Management
Typically when you buy rental property, you hire a property manager to handle the day to day issues that arise and to collect rent.
In most cases, the cost of this is 10% of your monthly income.
But since you live at dwelling, you can skip property management and save yourself the 10% in property management fees.
Since many rentals have a small window where they are cash flow positive, avoiding this expense can make a huge difference over time.
Of course, this means you are on the hook for handling repairs and collecting rent, but since you live next door, it shouldn’t be an issue.
And as an added bonus, since you are right next door, many tenants will treat the multifamily unit better because they know you are right there.
#5. Tax Benefits
Another big benefit of multi family property investment is the tax benefits you get.
You can write off the costs of maintenance and repairs you make on the rental units.
You can also deduct the insurance premiums paid, the property management fees and the utilities in these units as well.
You also get to depreciate the value of the home over time too.
These tax benefits all add up to a lot of tax savings for you.
Multifamily real estate investing is also a lot simpler way of being a real estate investor.
This is because you only need one mortgage and one insurance policy to cover the building.
If you owned a handful of single family homes, you would need separate insurance plans, mortgages, and more.
This makes it harder to manage and increases the need for a property manager.
#7. Risk Mitigation
Finally, when you own multiple units, you lower your risk.
This is because the odds are low that more than one unit will be vacant at the same time.
While it can happen, odds are you will have one tenant at all times.
With single family homes, if you don’t have a tenant, you have to pay the entire mortgage.
6 Cons Of Multifamily Properties
As great as the benefits listed above are, there are drawbacks you need to be aware of.
Here are the negatives to buying a multi family home.
#1. Lots Of Competition
Because the benefits I mentioned above, there are a lot of investors who specifically look for multi family real estate.
This makes is harder to find a property at a good price.
To help you be successful, you need to have a high quality real estate agent who not only knows the area you want to buy in, but also has a lot of connections.
This is because many times they will know of a multi family property that will be listed before it even is.
If you are lucky, you can close a deal before the building makes it the market.
#2. Higher Price vs. Single Family Home
Some larger multifamily properties will have a much higher price than a single family home.
In fact, some larger properties could cost millions of dollars.
The good news however is this is mainly focused on apartment buildings and homes with five or more units.
For duplexes and the like, the price will still be higher than a single family residential property, but not astronomically more expensive.
#3. Could Need A Higher Down Payment
Since a multifamily property is considered an investment, many banks will require you to put down a larger down payment on the building.
In most cases, you will need 20%.
This could be a deal breaker for some real estate investors who are just starting out as they might not have the cash for this.
The good news is this isn’t a hard and fast rule.
If you are living in one of the units, you might be able to get away with less money down.
At the end of the day, the better your relationship is with your bank, the easier time you will have in possibly getting a lower down payment requirement.
#4. Multiple Tenants
Another potential downside with multifamily housing, you have to deal with multiple tenants.
If you own a duplex, this might not be a big issue.
But once you get into larger multifamily properties, this can be an issue.
There will be more maintenance requests, more tenant turnover, more rent to collect, etc.
The headaches that could come could be large.
It is at this point you might need to look into a property management company so you don’t lose track of things.
The good news is you can control most of this.
You are not forced to multifamily units with five or more units in them.
You can stick with smaller multifamily homes and keep the work at a reasonable level.
#5. Higher Property Taxes And Insurance
Because you are insuring a rental property, the insurance premiums you pay will be higher on multifamily homes versus a residential property.
And while you can write off some of these premiums, know that you don’t get the same benefit.
For example, you might pay $1,000 in insurance premiums, but since this is a deduction, you can only write off a portion based on your tax bracket.
If you are in the 25% tax bracket, you can write off $250.
Additionally, property taxes could be higher as well since the value of the property is more.
As with the point above, you can write this off on your taxes, but you don’t get a dollar for dollar match.
#6. Could Experience Low Appreciation
Since multifamily real estate is mostly sought after by investors, it could have a lower appreciation rate over time.
Added to this, if there are economic downturns, fewer investors might be out looking for properties, driving prices down.
This is in contrast with single family homes as there is always a demand because of the large pool of potential buyers.
As disheartening as this sounds, it shouldn’t be a reason to stop you from investing in multifamily real estate.
The benefits far outweigh this small risk.
There are the pros and cons of multifamily properties you need to be aware of.
There are many great reasons to start multifamily investing over single family rentals, the biggest being the ability to live mortgage free.
But there are also some drawbacks that you have to be comfortable with to make this work long term.
As mentioned earlier, you can control how big you want to go, and if you are happy with a small investment portfolio of properties, then stick to this plan.
With consistent cash flow, your finances will be happy you did.