In a time of economic uncertainty where high inflation and limited inventory weigh heavily on the minds of investors. many are uncertain when it comes to moving ahead with real estate deals. With concerns about a recession being on the horizon, investors may be wondering what is the best place to put their money that will serve their long-term financial interests.
In other words, they want to know what a safe investment is when economics are shifting. As we discussed in an earlier blog, a recession can be an excellent time to invest in real estate. Unlike the stock market, real estate provides a solid strategy against market unpredictability, is a hedge against inflation, and offers a wide range of tax advantages.
This is especially true when it comes to investing in multi-family properties. Due to the imbalance between supply and demand, multi-family properties are generating extremely reliable income and cash flow for their owners. In this blog we’re going to take a close look at the benefits of investing in multi-family properties.
What Is a Multi-family Property?
Simply put, a multi-family property is any residential property that contains more than one housing unit. Duplexes, townhomes, apartment complexes, and condominiums are common examples of multi-family properties. Any property type you can think of that involves multiple units in the same property, even if the owner lives there, is a multi-family property. For example, if you live in one half of a duplex and your friend is in the other, you both live in a multi-family property.
Two- to four-unit multi-family properties are a great way for first-time investors to wade into rental property ownership. Many investors will begin by owner-occupying a small multifamily property, living in one unit and renting the other(s). Other investors choose to buy multifamily property (or properties) without occupancy, capitalizing on the passive income generated from renting.
Large apartment complexes and high-rise apartment buildings are also examples of multi-family property. The easiest way to invest in these commercial properties is through joining an investor group that specializes in real estate syndication.
Now that we’ve defined what a multi-family property is, let’s take a closer look at the benefits of investing in multi-family properties.
While a single-family property generates a single monthly income, a multi-family property produces multiple forms of monthly income. These investments represent an inventive opportunity to produce additional income from one investment.
One of the primary reasons investors like multi-family properties is for the cash flow it generates each month. In general, it provides a steady and reliable cash flow in the form of rent collected from tenants. Rents are predictable and not likely to vary from month to month. In a good market, units can be turned over easily and re-leased to ensure a consistent cash flow year in and year out.
A sound multi-family investment provides the investor with passive income, in the form of monthly or quarterly cash flow from rental payments. This is one of the primary benefits of investing via real estate syndication with a company like Black Girls Buys Houses.
In this case the investment company, working with a property management team, deals with both the expense and the time investment necessary to upgrade and maintain a portfolio of properties. For the investor, who collects a regular dividend, the income is truly passive. And, an investor typically makes more money with multi-unit housing rather than a single family home.
As an aside, the more income a property receives, the higher its value is. Multi-family properties consisting of more units, translates into multiple streams of income. As a result, these investments are generally valued higher than single-family homes.
All investments carry risk, and that’s certainly true of real estate. Multi-family property is considered a relatively “safe” investment compared to other real estate asset classes. That’s because even during an economic downturn, people need somewhere to live.
Multi-family property delivers something which strengthens the United States economy because people will always require comfortable, affordable housing, located near schools and their places of work. Compare this to office, manufacturing, or retail properties in which demand almost always decreases when the economy slows.
Investing in multi-family properties also helps to provide safe, stable housing for America’s workforce which is a responsibility we take very seriously at Black Girls Buy Houses. By investing in multi-family properties, you can support local communities, improving the quality of life for those looking for a place to live and work.
Another risk reducing factor is that multi-family property owners have more than one tenant. If you own a single-family home and your only tenant decides to move job, 100% of the future income from your property is dependent on your ability to secure a new tenant.
On the other hand, if you own a small apartment building with four units, one tenant leaving just reduced your income by 25%. One tenant moving in a ten-unit building only reduces it by 10%. Owning multiple multi-family apartment complexes, in different areas, can increase this diversification benefit even further.
Also, while multi-family refers to a single type of real estate asset class, it gives an investor a wide range of options given the many product types that make up this sector. For instance, you can invest in small, neighborhood-oriented duplexes or triplexes. Or you can invest in freshly-renovated properties. Or you can choose to invest in an apartment building. You can buy a multi-family property and rent it out on a traditional, year-long lease or you can invest in one and list it on Airbnb or another short-term rental platform.
Multiple Investment Instruments
Another reason investors are drawn to multi-family property is because of the numerous ways to invest. You can purchase a multi-family building individually, or you can partner with others. You can invest via real estate syndication, which as we described earlier lets you appreciate the benefits while taking on a more passive role in the partnership.
You can invest in a multi-family fund that has the ability to invest in multi-family properties across the country, which diversifies the location of your holdings and provides some risk mitigation. Alternatively, you can invest via a real estate investment trust (REIT), which reserves liquidity as shares can be bought and sold the same way as stocks and bonds. These are but some of the ways to invest in multi-family property, which is why it is so appealing to a wide range of investors.
Investing in real estate provides a range of tax benefits including:
- The ability to deduct expenses
- Further allowances for depreciation of your property you own over time
- Capital gains taxes (rather than income taxes)
One tax benefit that’s looking at in a little more detail is a 1031 exchange, which takes its name from Section 1031 in the IRS tax code. A 1031 exchange lets you defer the tax liability when you sell an investment property, by investing the earnings straight back into another property. Taxes can be deferred indefinitely, so long as there is no monetary benefit received from the sale of the property. This makes it an effective means to build an investment portfolio and increase your capital.
Support Local Communities
Finally, but significantly, investing in multi-family properties helps to provide safe, stable, affordable housing for America’s families and workforce. By investing in multi-family properties, you can help sustain local communities, while improving the quality of life for those in need of a place to live and work.
Anyone who is interested in owning rental property should take a hard look at investing in multi-family property. You can begin investing gradually, with just two or four units at a time. You can even utilize an owner-occupied strategy initially, as a way of truly “living” the property management lifestyle before investing in larger multi-family properties.
As your portfolio develops over time, you can sell the smaller units and roll the proceeds into larger multi-family investment. If you have a buy-and-hold strategy you can keep your smaller multi-family homes while the tenants pay down the mortgage and the values appreciate. Eventually, you can leverage the equity in your multi-family portfolio to invest in larger multi-family properties.
Both of these methods are how some of American’s wealthiest individuals got to where they are today. Don’t forget, the most significant facet of real estate investing is just getting started. Investing in small multi-family properties is a great way to get started.
If you have any questions about investing in multi-family properties or are ready to buy properties now, let’s connect – we’d love to help you whether you are just getting started or are a seasoned investor.