Why Multifamily Properties for Real Estate Investment Returns?

Multifamily properties are a preferred investment strategy for many experienced investors as it is perceived to be the most affordable option with greater returns when building and diversifying a real estate investment portfolio.

When people look to invest in real estate they will often look at single family homes rather than multifamily properties due to their low cost of acquisition.  However, when looking at per unit cost, multifamily properties are often lower cost in comparison but prior to investing it does require that you have a good team of investor professionals including a mortgage broker, lawyer, real estate agent, accountant and property manager to name a few. 

Multifamily Property

If you are new to real estate investment, you are probably envisioning a multifamily property as a 25-50 unit apartment building costing millions of dollars.  However, a multifamily property is simply two or more units within the same building.  It can start from a duplex or fourplex and up to a large apartment building.  Where you fit in the investment scale depends on what your long-term investment goals and your financial situation.  

Benefits to Multifamily Properties

Economies of Scale

By definition, all units in a multifamily property are located under the same roof.  Having one location rather than multiple locations are easier to usually easier to manage as they share one roof, one property for upkeep and only one location to visit.  Typically, the larger the building the better the economies of scale for property management expenses as they become cheaper to operate on a per unit basis.

Equity

Appreciation is the amount that your property will hopefully increase in value over time.​  With Single family homes, the value of it is determined by a home appraisal and how much similar properties in the area have sold for.  With Multi-family properties, the value of the property is based on the capitalization rate (cap rate).  

As the value of a multifamily property is determined by how profitable it is, finding properties that are not preforming optimally or in an up and coming market provide opportunities to increase rental rates and therefore the value of the property. 

Investment Cost

Many people look to single-family homes for real estate investment as the total investment cost can be lower. However, when looking at any real estate investment you are looking at the performance of each individual rental unit and when you consider per unit cost of a multifamily property it will most often be better than a single-family home.  With the location strategy a lower per unit cost will most often increase and investors return.

Cash Flow

When you buy the right multifamily property in the right location you have higher potential for cash flow.  Cash flow is key to good real estate investments and the benefits of higher cash flow can be summarized mostly from the above point.  ratio of rent to price is usually higher, expenses lower through economies of scale, can have greater impact from value add investments and vacancy of one or two units does not impact cash flow as much as single family homes.

Financing

Although it may cost more to enter into the multifamily market, if you have the right numbers on your property, it can be easier to obtain financing.  The reason for this is that investors in multifamily properties have been shown less likely to default on their mortgage.    If you have one vacancy in a 10 unit building, you lose 10% of your rental income and would likely be still able to cover your mortgage costs and therefore are considered lower risk for financing.  If you have a vacancy in a single family home you have no rental income making it more difficult to cover mortgage costs and more likely to default. 

Selling the Property

Most sophisticated investors have an exit strategy for each of their investments. There are two main benefits of multifamily properties over single-family properties.  The first is that you are selling one asset rather than multiple single family homes which can vary in the length of time it can take to sell.  Secondly, as we stated previously, investors seek out multifamily properties to build their investment portfolio.

Faster Growth of Your Investment Portfolio

It is much easier and faster to purchase one 10 unit building than it is to purchase 10 single family homes.  The faster that you get into the market, assuming you have bought your property strategically, the faster you can build cash flow and other real estate value generators. 

Conclusion

There are many ways to analyze an investment and if you are not an experienced investor so you should always consult your financial planner and accountant to see if this is a good strategy for you.   If you are interested in exploring the multifamily investment market with our experienced and dedicated team, please reach out to us.