What makes for a better investing decision? Buying a single-family house and then renting it, or investing in a multifamily real estate deal? That is a million-dollar question in the real estate investing space, especially when the market cycle is likely to enter a recessionary phase. A single-family home purchase and then making it apt as an investment property is a common practice. It’s a simple concept and easy to execute. But often, investing in a multifamily property could prove to be more stable and profitable. With the potential for passive returns, stability, capital gains and tax advantages, multifamily investing is something that has become increasingly appealing.
Here are the reasons why investing in multifamily will be a smart move for you:
Security and stability
Investors are in search of a lasting passive income stream that can withstand market fluctuations. If you own a single-family home and your renters stop paying their rent, you are obliged to continue on with the mortgage payments as the owner of the house.
In a single-family property, you may not have opportunities to add value and raise valuations and rents. Plus, you become responsible to find and manage tenants. Sometimes it becomes an exercise that requires time and effort, and your property doesn’t earn anything until you get a tenant.
In a multifamily building, you will frequently find tenants. In addition, having the ability to lease multiple units instead of a single unit creates opportunities for real estate investors to reduce vacancy rate, help with expenses, and ultimately mitigate general business risk. With dependable and ongoing revenue such as monthly cash flow, appreciation, mortgage pay down, and yearly tax perks, this particular investment is substantially less risky.
Remember, a vacant single-family home is 100% vacancy with no rental income. Whereas in Multifamily, one vacant unit in a 100-unit apartment complex is 1% vacancy, implying that the property still keeps earning rent from the other units. As a passive investor in multifamily real estate, your returns won’t go down to zero like single-family (in case of vacancy).
Building a portfolio is easier with multifamily
Which option makes more sense financially? Investing in 10 single-family homes, or 10 units in different apartment buildings? Managing single-family homes as an investment property would require time and effort from your end. A large number of single-family investors are switching to multifamily investing because of this reason. You can’t scale up your investing if you are too busy with one or a handful of single-family properties.
You don’t necessarily need to manage the property,
In some instances, handling different rental properties can be disadvantageous as, not only may it cost a lot to retain a property management company, but your time may not permit for your portfolio to be managed as it should be. The amount of money multifamily properties provides each month provides their owners room to take advantage of property management services without cutting profits.
Clearly, as a passive investor, you don’t have to involve in property management and operations at all.
Investment volume
Investing in multifamily real estate starts from $25,000 for 506(b) deals and $50,000 for 506(c) deals for accredited investors. Check out our list of FAQs to learn more about the criteria for accredited and sophisticated investors. It is nearly impossible to invest in a single-family home at these price points.
There are several other benefits of investing with professional multifamily syndication companies. These are managed by experienced professionals who have access to professional resources and networks to identify high-potential deals. Involvement of several investors in the deal also diversify your risk.
In the multifamily syndication, a General Partner (GP) is responsible to execute the investment process. The GP is also responsible for capital raising and find Limited Partners (LP) for a deal.
Tax advantages
Multifamily real estate investors can avail of various applicable tax benefits in consultation with their CPA. Typically, these benefits are derived by applying depreciation and deferring capital gains through 1031-exchanges. A 1031-exchange allows a real estate investor to sell an investment property (i.e. not personal property) and reinvest the proceeds into a similar investment, deferring capital gains tax in the process.
Interested in learning more about Multifamily Real Estate investing, check out our resources.