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Key Benefits Of Investing In Multifamily Real Estate
Last Updated: August 21, 2o24
Steve Nabity
August 21, 2024
Introduction
Multifamily real estate is a sub-segment of residential real estate involving multiple separate housing units or apartments. The reasons why multifamily real estate has been a favorite among investors are multifold. Firstly, you are not dependent on a single tenant for timely rent collection. You have tens or hundreds of them which provides some diversification. Secondly, there are economies of scale at play as operating expenses get spread out over a large number of units. Lastly, there is increasing demand for rental housing due to demographic shifts and urbanization.
In this article, we will explore why multifamily real estate has the potential to provide stable income and long-term growth. We will look at how certain key risks of real estate investing are mitigated through multifamily investing. We will also touch upon tax advantages investors can expect by investing in multifamily properties. Lastly, we will suggest some steps that potential investors can take right away to begin harvesting the benefits of multifamily real estate.
Consistent Cash Flow
Investing in an asset class like real estate often comes with the expectation of a regular income stream. Real estate is something of a mix between equity and debt. There is capital appreciation over the longer term, but there is also consistent cash flow through rental income and other income generated from a property or a portfolio of properties.
Compared to single-family real estate, multifamily is more stable in terms of cash flow. If a few units are vacant, the occupied ones can still generate income. If some tenants are late paying their rents, the income stream is still sustained by those who pay on time. Collecting rent from multiple tenants at a single point/location is also more efficient than driving around town to multiple properties. Consistency and stability are why investors prefer multifamily real estate.
Economies of Scale
Imagine that you owned several single-family units across a city or a state. How much work would you have to put in to get the maintenance done, collect rent, manage each property, and fix basic issues? What if you had, say, 150 units in 1 location? You could bulk purchase materials, hire a property manager at the location 24X7, and enjoy several other scale benefits.
As a property owner or an investor, it is more efficient to manage real estate when it is consolidated than when it is scattered. Per unit expenses and the cost of ownership are much lower in the case of multifamily real estate. Plus, the incremental cost to manage additional units is also lower, allowing investors to scale up.
Reduced Vacancy Risk
One of the risks in letting out a property is whether the tenant will pay rent, and pay it on time. If something happens to the tenant or if he/she gets laid off, then the ability to pay rent can become a challenge for the landlord. Another risk could be the tenant deciding to move out. The onus then falls on the landlord to find a new tenant who is creditworthy enough to assure timely rent payments.
Multifamily properties mitigate these risks to quite an extent. Having multiple tenants means the landlord is not dependent on any one tenant. If one doesn’t pay, the others still do and there is some cash flow coming in. If a tenant decides to leave, the others are still around and a new tenant can be found. Having multiple sources of rental income from multiple tenants provides diversification. Having investments in multiple properties further mitigates the risk with investment diversification.
Appreciation and Equity Growth
Real estate prices, in the long run, tend to grow steadily. The value of a property can appreciate due to several other reasons. There could be improvements (renovations) on the property, the demand for rental housing might drive up rents and push up values, and the overall economic growth could drive price increases as well. Managing an under-managed property can also boost the net income generated and enhance the value of a property.
Over time, as the mortgage on the property gets paid off, the equity portion builds up steadily. Eventually, the initial equity appreciates meaningfully. The income from a property can be reinvested to improve the property or pay down debt. Multifamily real estate can provide compelling opportunities for capital appreciation and equity growth.
Tax Advantages
Investing in real estate comes with some key tax advantages. Tax deductions help bring down the taxable income. Most real estate is purchased using debt. Interest payments on such debt are deducted from the income for calculating the taxable income. Similarly, the depreciation of a physical asset (like property) is also an accounting expense subtracted from the income to arrive at the taxable income.
Capital gains tax earned on a real estate investment can be deferred if certain conditions are met. The Internal Revenue Code has a provision called the 1031 exchange that allows a real estate investor to defer paying capital gains taxes on the sale of a property provided that the proceeds from the sale are reinvested in a “like-kind” property within 45 days.
Portfolio Diversification
Portfolio diversification is closely linked to the correlation between different asset classes. Ideally, one would want to hold investments that have a low correlation to one another. That way, if one asset class gets into trouble, the others keep moving independently. Real estate tends to have a low correlation to the stock market.
An asset class like multifamily real estate can also provide some stability during an economic downturn. Housing is, after all, one of the basic needs of a population, and rental units tend to remain relatively steady when the economy falters. By including multifamily real estate in an investment portfolio, investors can achieve investment diversification.
Inflation Hedge
Inflation eats away at wealth. It is like a silent tax that erodes the purchasing power of your dollar. So, when investing for the long term, it becomes important to protect against inflation. With real estate and multifamily properties, you can hedge against inflation by raising rents over time. By keeping up with rising prices and costs, the goal is to maintain the value of the rental income.
Higher rents also positively impact property values and help protect investor wealth. Over time, additional income streams can also be added by offering value-added services like internet, covered parking, and package lockers. Inflation protection can be achieved in multiple ways. Multifamily properties can help grow property income, improve capital value, and enhance purchasing power despite inflationary pressures.
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Scalability and Growth Potential
As multifamily properties have multiple units under one roof, they offer several scalability advantages over single-family properties. Firstly, it is more efficient to maintain and manage the property. One could hire a professional property management service to look after the property and partner with such a service on future acquisitions. Having a relatively stable income stream from quality tenants opens up options for better financing from institutional lenders.
Investors can use leverage prudently to grow their portfolios as lenders may be more willing to finance deals for properties with many tenants and offer multiple sources of income. Investors can deploy capital at scale and earn strong returns by choosing the optimal size of properties to invest in. Multifamily properties can have less than 20 units or even north of 500 units. There is something for investors of all appetites.
Professional Property Management
Looking after a multifamily property is a lot of work. There are requests for maintenance, other day-to-day operations, and rent collection. The success of a multifamily property depends on maintaining healthy tenant relations and maintaining a high level of tenant satisfaction. After all, tenant retention will be high only if the tenants are happy.
Hiring a professional property manager allows the landlord to deliver resident services efficiently while staying on top of the day-to-day operations. It also allows investors to focus on what they do best – invest in additional properties. Professional property management can leverage the skills and resources of its experienced managers to maximize returns and streamline operations.
Getting Started with Multifamily Real Estate Investment
To get started with multifamily real estate investing, we highly recommend you download some free resources. The two ebooks on finding the right deal and keys to real estate investing are easy reads and will give you a good primer.
You should also think about your financial goals, risk appetite, and what you ultimately want to achieve through multifamily investing. When you have some idea about these, we suggest that you request an invitation to join our exclusive community of business owners and entrepreneurs. We regularly share information about institutional-grade private real estate investing opportunities. You can also schedule a call with us or learn more about Skyline Point Capital here.
Conclusion
Multifamily real estate is an asset class that offers a host of benefits. It does come with its own set of risks. But, by partnering with the right folks and going for the right deals, one can achieve various financial goals through multifamily investing.
In this article, we discussed what multifamily investing offers, how you can take advantage of tax benefits, how certain risks can be managed, and what multifamily real estate can add to a portfolio of other investments. We also touched upon professional property management and scaling up investments in multifamily real estate. As mentioned above, the best way to take action is to get in touch with our team of experts or learn more about Skyline Point Capital here.
