Stocks and bonds are volatile assets, and investors only have a passive role in determining the value of the assets and facilitating the growth of their capital. If you wish to invest in something more stable where you can play an active role in growing your capital wealth – you should consider multifamily real estate investing as your next big investment venture. These are properties with multiple rental units and hence, have more sources of income.
Your revenue can be multiplied by a multifamily property with opportunities for scaling and expanding. Renting out multi-family properties often benefits from economies of scale, is easier to finance, and has a higher rate of return on investment.
Why is Multifamily Housing Investment So Popular?
The idea of owning an apartment complex is sometimes perceived by investors as being too intimidating or strange a concept to even consider. But over the past few years, multifamily apartment investing has become more and more well-liked due to the possibility of security and consistent income.
It is pretty straightforward: buying multiple residential units under one roof or in one complex is simpler and more convenient than purchasing single-family homes across different properties.
Buying multi-family properties has several benefits. These include the potential to expand your rental property portfolio easily, access to simpler and better financing options, and the luxury of hiring a property manager to manage the property with expertise.
Things to Consider When You Invest in Multi-Family Properties
- Education is the Key
Educate yourself about the different types of multifamily properties and find the one most profitable and easily manageable for you. Multifamily apartment investing is a huge decision – one that should be made after deliberation and discussion with experts.
You must analyze how profitable your investment would be based on its location. It is the single most important factor on which investors determine how to value a multifamily property. It is also recommended to consult professionals with years of experience in real estate investment to gain adequate knowledge about multifamily properties and make smart investment decisions.
- Pick your Loan Program and Lending Institution Consciously
Your bank or other lending institution should be a reputed one, as that reduces the risk of a bank run and associated problems. You should compare different loan programs to determine which one has the lowest interest rate and a reasonable percentage of the down payment.
If you take out an FHS loan, your down payment surmounts to just 3.5% as long as you live in one of the units of your multifamily property.
You can also look into equity loans and investments to finance your multifamily housing investment.
- Analyze your Net Operating Income (NOI) and Debt-to-Income Ratio (DTI) to Determine which Property will be the most Profitable
Your NOI is the difference between your revenue from the multifamily apartment investing and the expenditure on maintenance of the property. Expenditure also involves the taxes and miscellaneous fees you pay to manage your multifamily homes.
The DTI is the ratio of your income generated from the investment and how much is used to pay mortgages.
Both these figures help you examine statistically how much disposable income you can earn from multifamily housing investment. After all, your disposable income is the main indicator of the success of your venture! Hence, you would want to ensure that you are left with a high NOI and a low DTI.
- You can Always Start with a Small Endeavor and take on a Bigger Undertaking Later
If you worry that you will not be able to get a loan big enough for an apartment complex, let us assure you that you can still invest in multi-family properties. You can start by buying triplexes or quadplexes. Later, when you have generated enough income from these sources, you can reinvest that amount into bigger properties.
This is possible because multifamily real estate investing provides investors with economies of scale and opportunities to multiply their wealth steadily.
- Renovate your Property before Welcoming Tenants
It is normal to expect depreciation when you invest in multi-family properties built years ago. If you buy a property that has experienced some wear and tear, it is crucial that you do the necessary renovations before welcoming new tenants. Tenants always look at the state of the building and the quality of services like plumbing and air conditioning.
While this may seem trivial, you also need to see if all the doorknobs, door fixes, cabinets, handles, windows, etc., are in perfect condition. The aesthetics of the building are just as important as it is resilient.
- You may want to Hire an Experienced Property Manager
Managing multifamily real estate is a little difficult and complicated, especially if you are new to multifamily apartment investing. You can save yourself the hassle of hiring different mechanics and technicians for repair and maintenance by employing a professional property manager.
An experienced manager will take care of all the repairs and maintenance tasks easily and precisely, saving you money and effort. The cost per unit and labor in multifamily homes is much less, so you have enough resources at your disposal to hire expert managers.
- You Become Eligible for many Attractive Tax Breaks and Exemptions
Did you know you can avail multiple tax exemptions by buying multi-family properties? It makes sense to think about this kind of investment when you take into account all the tax advantages multifamily property owners receive. Only a few investment opportunities give you the option of little to no tax payments.
You can reduce your tax obligation by using a cost segregation analysis to accelerate depreciation. Additionally, you can use a 1031 Exchange – the right to defer payment of capital gains tax – to reinvest your profits after the property sells to protect them. Investing in multifamily properties is a great idea when everything is taken into account.
- You must Maintain a Sufficient Savings Fund for any Unexpected Event
Finally, do not spend all your disposable income on conspicuous consumption or more investments. You need to maintain a savings fund with sufficient resources to help you in case of a crisis or unexpected situation. A buffer or safety net should go hand-in-hand with your new investments and asset purchases.
If you were confused about how to make money in real estate and how to invest in multi-family properties, we hope that now you have the answer to your question.
The co-founder of The Multifamily Mindset, Tyler Deveraux real estate investor, started his journey of investing in rental properties at the young age of 21 and has raised a net worth of $100 million since then! This is your cue to start buying multi-family properties and leading a comfortable, luxurious life!