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Considering an Investment in Multifamily Real Estate? Here's What to Know

Posted on Wednesday, November 6th, 2019 by Steve Anderson

When Will Rogers and Mark Twain can agree on a common sentiment several decades apart, you know that's something to pay attention to. The sentiment in question: “Buy land; they're not making any more of it.” Yet despite the inherent scarcity of land—at least, until we start colonizing other planets—prices remain high and picking the right parcel can be difficult. Investing in multifamily real estate can be a challenge, but one that offers some exciting possibilities.

Three Benefits of a Multifamily Real Estate Investment Strategy

Investing in a multifamily real estate set up, like an apartment building or even a simple duplex, has some distinct advantages to it that many don't consider.

First, multifamily real estate allows the investor to consolidate multiple holdings into a comparatively convenient package. Having a rental house is all fine and well, but it's just one house with one family. If there are several families in one building, that's the equivalent of having several separate rental houses, all contained in one building.

Second, multifamily real estate can be easier to finance; the business case is as clear to a bank or similar lender as it is to an investor. Several families are all paying rent, which means fairly steady income. Sure, there will be fluctuations, but the idea that the property will no longer produce income of any kind is minimal. This is an encouraging mark to any lender; there will likely always be some kind of income to pay back a loan.

Third, multifamily investing is actually smarter right now. Right now, the leading consumer is the millennial, and millennial consumers have long shown a predilection toward renting rather than buying. This is the case in just about everything from cars to clothes, and housing is no different. Having multifamily property, therefore, allows the investor to cash in on the preferences of the bloc with the largest amount of disposable income already on hand.

Learn More about Real Estate Investment Trusts (REIT)

Three Downsides to Multifamily Real Estate Investing

Yet as is the case with anything, multifamily real estate investing can come with substantial drawbacks to keep in mind.

First, multifamily real estate is expensive, even for real estate. A single-family rental property could run from the mid-five-figure range to the high-six-figure, depending on a variety of factors. A multifamily rental property, necessarily, could run into multiple millions of dollars. There are ways around this, of course, including focusing on duplexes or multiplexes, but even here these will often run significantly higher than the standard single-family dwelling, by sheer necessity.

Second, the degree of complexity increases. When you're dealing with just one tenant, you're more likely able to keep track of what needs doing, what the status of the rent outstanding is, and so on. Increasing the number of tenants involved, meanwhile, means necessarily increasing the complexity of the investment involved. Thus, groups like the Forbes Real Estate Council suggest investors keep back 10 percent of collected rents to establish a financial cushion to better address the unexpected issues of such complex investments.

Third, complexity comes from outside the investment itself. We've already covered the increase in complexity within the investment itself, in the increased number of factors required to manage a multifamily operation. Yet there's more than that to consider; finding tenants for a rental property requires several factors to be considered. Location, crime rates, schools available, internet access available and even rent rates are all a part of a family's decision on where to live. Multiply this complexity by the total number of tenants in the building—and frequently modify each of these values based on competing properties in the area—and you have a recipe for a mathematical nightmare.

Is the Risk Worth the Reward?

 

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