Top 5 Benefits of Investing in Multifamily Properties

By Ketan Patel
Date June 30, 2021

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Top 5 Benefits of Investing in Multifamily Properties

Passive real estate investing is a great way for people to diversify their investment and retirement portfolios away from traditional holdings like stocks and bonds. But when someone decides to begin investing in multifamily properties, they aren’t always sure where to begin. Multifamily investing is a great way to get started given its simplicity compared to other real estate asset classes. Investing in multifamily properties is a lot less complicated than investing in office space, retail hotels and other forms of passive real estate investing.

In today’s article, we look at the top five benefits of investing in multifamily properties.

What is multifamily investing?

Before we get started, let’s take a brief look at multifamily investing. Investing in multifamily properties can take many forms. At the smallest scale, someone can invest in multifamily properties by purchasing a duplex, known as “two-families” in some parts of the country. Triplexes and quad-plexes are the next step up, having three and four units each, respectively. 

Investing in multifamily properties with two to four units is a great way for first-time investors to begin their real estate investing journey. Many will begin by owner-occupying a small multifamily property. In other words, they’ll live in one unit and rent the other(s), using the rental income from the other units to offset their out-of-pocket costs for the mortgage, taxes and insurance. Owner-occupying rental property has many benefits: these properties are typically eligible for advantageous financing with lower interest rates and less of a down payment. By living on-site, the investor can more easily manage the property. Most will even self-manage. This can save hundreds of dollars each month on property management fees, but it is more of an active real estate investing strategy than passive. 

Those looking to passively invest in real estate may want to consider other forms of multifamily investments, including larger properties with 50+ units. Many of these deals are offered through real estate syndication (more on this below).

Larger multifamily properties, anything with more than five units, start to fall into the “commercial real estate” category. Properties with 5+ units typically qualify for a different type of financing, which is usually more expensive than properties that are considered strictly residential. 

Properties for multifamily investing can continue to grow in size and scale, and can include hundreds (even thousands!) of units. Large apartment complexes, for example, and high-rise apartment buildings are other forms of investing in multifamily properties. Sometimes multifamily property will cater to a specific demographic, such as students or seniors, but this is not always the case. The majority of multifamily investing properties are agnostic to demographics (aside from catering to the general local demographic).

The Top 5 Benefits of Investing in Multifamily Properties
There are many benefits to investing in multifamily properties. Anyone considering passive real estate investing will want to look at this asset class, particularly if it is their first time investing in real estate. Here are the top five benefits to multifamily investing.

• • • Cash flow. One of the reasons people are drawn to multifamily investing is for the cash flow it generates each month. Rents tend to be predictable and in strong markets, units can be turned over easily and re-leased to ensure steady cash flow year in and year out. When investing in multifamily properties, either directly or through syndication real estate, investors will collect that cash flow each month, often in the form of investor distributions.
      

• • • Passive income. Investing in multifamily properties is a great way to generate additional income without exerting much day-to-day effort. It is easy to hire a property manager who manages the property on your behalf. That said, direct ownership still requires some active effort, including identifying deals and running due diligence on properties, then managing the property manager, and compiling all tax documents and other records.
      Those who want a truly hands-off approach, those who want to explore passive real estate investing in earnest, may want to consider syndication real estate. Syndication real estate is when a sponsor pools capital from investors, and then collectively invests that money in a deal that the sponsor then manages on behalf of investors. The sponsor is responsible for all decision-making and reporting back to investors, which frees the investors from having to be involved in the minutiae of owning the property.
      

• • • Valuation potential. While there is no guarantee that multifamily properties will always appreciate in value, they do tend to hold their value well compared to other asset classes. Those who have a long-term investment horizon will find that typically, multifamily properties appreciate over time. Real estate values ebb and flow, but over the course of multiple real estate cycles, values tend to continue their upward climb. Multifamily investors benefit from the higher value upon refinance or sale, which is passive income generated in addition to the ongoing cash flow noted above.
      

• • • Lowered risk. Multifamily investing is considered relatively “safe” compared to other real estate asset classes. That’s because even during an economic downturn, people need somewhere to live. In fact, during a recession, many people are forced to sell their homes and in turn, move into rental housing. It can take a while for people to rebuild their credit after an economic downturn, which creates prolonged demand for multifamily property. Compare this to office or retail properties, for example, in which demand almost always decreases when the economy slows.
      

• • • Tax benefits. Investing in multifamily properties comes along with many tax benefits. Most investors will use a mortgage to finance the purchase of multifamily property. They can then take a deduction for mortgage interest paid during that fiscal year, which tends to be higher in the first years of ownership as the loan begins to amortize. Multifamily properties can be depreciated over a 27.5-year period, even if the property technically appreciates in value. Depreciation can be used to offset a significant portion of the passive rental income collected each year, making this a highly attractive form of passive real estate investing. Investors can also benefit from tools such as the 1031-exchange, in which the owner can sell a property and roll the proceeds into another like-kind asset (e.g., another multifamily investment property) and defer paying capital gains tax. This is how many investors scale their multifamily portfolios over time.

CONCLUSION
Anyone who is interested in passive real estate investing will want to take a hard look at investing in multifamily properties. Multifamily investing is an asset class that people can begin investing in gradually – either on their own, with two- and three-unit properties, or through nominal investments ($10,000 to $50,000) in syndication real estate. 

Investing in multifamily properties can feel overwhelming for first-time real estate investors. The hardest part is overcoming the fear associated with the “unknown” – i.e., an alternative asset class that one has never invested in before. 

Teaming up with a great, highly-qualified sponsor is a great way to get started. 

Are you ready to invest in multifamily properties? Contact us today to learn more about our approach to syndication real estate.