Why Multifamily Properties Are a Good Real Estate Investment
Multifamily properties is one of the five types of property categories associated with real estate investment that many real estate investors commonly swear by.
The other four types of property associated with real estate investing are land speculation, single-family homes, commercial and industrial properties, and retail shops and shopping centers.
Multifamily properties share many of the same characteristics common to all income-producing properties, and not unlike any investment property associated with real estate investing, investors always stand a chance to grow their wealth with any of the property types. So I'm making it the object of this article — not to say that it's necessarily the "best" type of real estate investment — but as a matter of personal experience and preference.
Multifamily property is considered to be any rental income property that has more than one family unit and can range from a property as small as a duplex consisting of two units to a large apartment complex consisting of hundreds of units.
Much the same as any income-producing properties associated with real estate investment, multifamily property has the advantage to be able to support debt from the income it produces using other people's (tenant) money.
For unlike vacant land or single-family home financing, lenders evaluate their lending decisions based more upon the property's income stream than the investor's personal financial strength. In other words, primarily due to the income generated by other people's money, an investor is given an edge in financing the investment and more likely to obtain a sound financing package than otherwise possible.
Okay, but there is one particular advantage of multifamily properties that makes it a good real estate investment compared to the other types of income properties.
Namely, it serves a basic need by providing shelters to those who cannot afford or who do not choose to buy real estate. Whereas a tenant may vacate an office complex or strip shopping center, for instance, people do have to live somewhere.
With that in mind, then, allow me to suggest a few things you must do to maximize your chances of profitability with multifamily properties.
- Stay informed regarding local rental market trends. Watch the newspaper or drive around the community noting all rental properties that have vacancies. If you see few "for rent" ads or signs it could signal a shortage of rental units and a favorable opportunity for you to raise rents. On the other hand, numerous signs and ads could signal higher vacancies and maybe rent reductions.
- Remain flexible with your rental policy. When there's a shortage of apartments in your market, you can be selective about the type of tenant to rent to. When the rental market shifts and there's a shortage of tenants, prepare to be reasonably less selective or perhaps to make concessions like allowing pets, for instance.
- Management problems associated in dealing with tenants can be the downside to buying any income property. So consider hiring the services of a professional property management company to deal with the day-to-day issues of running your rental property.
- If the former property owners have let the property run down and rents decreased to keep the units filled, consider an opportunity to upgrade the building and raise rents. When multifamily properties are in a good area of town or in an area that is returning to a former higher quality, remodeling a rundown apartment complex can be a profitable venture. Just be sure to proceed with caution because major repairs can uncover other issues.
Rule of Thumb
Obtaining a sound financing package that doesn't place excessive burdens on the property or yourself is paramount to your investment in multifamily properties. Therefore always present lenders with clear and concise cash flow reports that show the income and expenses accurately.