Real estate investing has always been a popular form of investment, in part because there are so many options. Rental properties, home flipping, and commercial property strategies have all waxed and waned in popularity over the years, but one approach consistently promises more stable, long-term value: multifamily real estate investing.
So what is multifamily real estate investing, and why is it so valuable?
Multifamily Real Estate Investing
Let’s start with a high-level overview of multifamily real estate investing. As the name suggests, this type of investment is focused on residential properties capable of housing many families simultaneously. They could be in the form of a conventional house, split in such a way that there are multiple family units, or in the form of an apartment building.
In any case, these properties are typically purchased at a low price, fixed up to be more appealing to tenants, and are filled and managed to ensure they remain operational. Depending on the property and the situation, there may be full-time staff members tending to the property. Rent is collected from each family as a form of income, typically exceeding the monthly expenses of the property when the units are full. At some point, the property may be sold (ideally for a profit).
The Benefits of Multifamily Real Estate Investing
Why is this form of real estate investing so popular compared to the others?
- Steady rental income. Flipping houses and long-term property plays can be lucrative, but they don’t provide the steady stream of income that a rental property can. Rental income is reliable and predictable, providing a consistent stream of revenue to investors. And with a multifamily property (as opposed to a single-family property), you’ll have more income coming in each month.
- Other income opportunities. Rental income isn’t the only type of income a multifamily property can generate. Because there are many families and individuals on the property, there are options for alternative modes of revenue generation. For example, you may install vending machines, where people can purchase snacks or drinks for small amounts, or washers and dryers that are coin-operated.
- Vacancy limitation. One of the biggest risks associated with residential real estate investing is the threat of vacancy; in a single-family unit, you’re dependent upon that unit being occupied to make money. If and when the tenant leaves, you’ll be without income, while still needing to pay monthly expenses. If the vacancy becomes prolonged, it can eat into your profits. But with a multifamily property, you can mitigate the risk of vacancy. If you have a property with 10 units and only 1 of them is vacant, you’ll still be seeing 90 percent of your typical income, which should be perfectly sustainable. Barring some major exodus of tenants, vacancies are no big deal.
- Risk management. Multifamily properties are also a great way of managing other risks. You can imagine all your risks as occurring a certain percentage of the time. For example, let’s estimate arbitrarily that 5 percent of your tenants will fail to pay on time, and 1 percent will require eviction. If you’re stuck with these outliers in a single-family property, it could jeopardize your entire operation. But in the context of a multifamily property, the worst-case scenario is nowhere near as devastating. Because you’ll have more tenants in and out, you’ll be more likely to see a non-paying tenant or an eviction, but the odds of having two or more at the same time in the same property are much rarer.
- Fewer transactions. If you were interested in single-family residential properties, and you wanted to scale, you would need to add new properties, one at a time. For example, let’s say you have a property that generates $1,500 in rent and costs $1,200 per month, on average. You’re making a $300 profit and you want to increase that to $900. You’ll need to buy two more similar properties to do this. The trouble is, buying a new property is difficult and time-consuming; you’ll need to review many options to find the “right” deal, do your due diligence, and secure funding for each property. But with a multifamily property, you’ll gain access to many new streams of revenue with a single purchase, focusing your due diligence on a single transaction.
- Flexibility. Finally, multifamily properties are extremely flexible. There’s no one type of multifamily property to invest in, and you can find them in neighborhoods all over the country. Accordingly, you can get exposure to many types of neighborhoods in many areas, diversifying your strategy further, and you can buy and sell them whenever you’re ready to rebalance your portfolio.
Limiting Factors for Multifamily Real Estate Investing
That said, multifamily property investing isn’t a guarantee of success, nor is it a perfect strategy with no downsides. New investors often experience hurdles when trying to get started with it. For example, multifamily properties are typically more expensive than single-family properties, meaning you’ll need to raise more capital to make a down payment—and you’ll be exposed to the risk of a bigger loan. Additionally, it can be hard to inspect and be confident in the integrity of a bigger, more complex building.
This is why many investors interested in multifamily real estate end up working with a real estate investment firm. The firm takes on the responsibilities of researching and acquiring new properties, as well as managing those properties, while splitting returns with investors. It’s an easy way to earn the benefits of multifamily real estate while saving you time and limiting your personal responsibilities.
If you’re interested in multifamily real estate investing, but you aren’t sure what to do or how to get started, one of your best options is to work with a team of experts who can help you choose the right properties, manage those properties, and generate long-term returns.
Contact the GSH Group today to learn how our experts can help investors like you make money from multifamily properties.