Multifamily properties come in all sizes from duplexes to high rise apartment buildings. Many investors are jumping on the multifamily property bandwagon with the hope of increasing their income and growing their portfolio. Are these properties the money makers that they’re made out to be?

Benefits Of Multifamily Property Ownership

More Cash Flow

The most obvious benefit of multifamily units is that they produce more cash flow than single family dwellings. With multiple units generating income at one property the building is able to generate a substantially larger amount of revenue. Furthermore there is inherently a greater predictability in cash flow with multifamily properties.

The increase in units means that if one tenant leaves, the property is still generating income. When a tenant vacates a single family dwelling they take the entire revenue with them. When this happens the property is costing the owner money. This is far less likely to happen with multifamily buildings.

Better Appreciation In Value

As all property owners know, there is always some risk involved when investing in real estate. Not all properties appreciate in value the way investors expect and many don’t live up to expectations. Sometimes properties even depreciate after purchase and in worst case scenarios investors are forced to sell for less than the purchase price.

In order to protect themselves, investors aim to find properties which are more resilient to economic downturns. Multi family homes tend to be good long term investments. While the housing market is cyclical with periods of strong growth and periods of decline, multifamily properties have a strong tendency to increase in value over time.

Higher Tax Benefits

There are many tax advantages that come with multifamily properties. Investors are able to get a deduction for the interest they pay on the mortgage for the property. The percentage of interest paid is usually higher in the first years of the loan which can be a big help considering multifamily dwellings are generally more expensive.

The larger tax deductions in the early years are a big incentive for investors with smaller portfolios. Additionally, multifamily properties can be depreciated over 27.5 years which can be used to further offset rental income. The property can be depreciated even if it actually appreciates in value for a much bigger return in the end.

Less Risk

Residential real estate is considered one of the safest investments when it comes to economic cycles. Unlike office or retail spaces, residential properties are always in demand with renters. Even during a recession people need somewhere to live. The demand for commercial spaces generally goes down when the economy slows but residential units can remain quite stable.

Having multiple renters in one building helps mitigate the risk too as it is less likely that the property will go through periods of no cash flow. The income from multiple rents offers more stability and less risk for property owners. This is lucrative for investors making multifamily properties easier to sell even during periods of economic uncertainty.

Cons Of Multifamily Property Ownership

More Management Intensive

Multifamily properties have greater management intensity simply due to the increased number of tenants at the property. Greater number of units to maintain, more leases to deal with, increased maintenance tickets, and a larger number of people to communicate with means that a multifamily property comes with a bit more work than a single family home. The difference is even more apparent when comparing to commercial spaces where turnover is lower and tenants are generally responsible for more of the maintenance than in residential settings.

On the other hand, there are efficiencies to managing multifamily properties versus scattered single family homes. Having all the units in one location reduces travel time when dealing with issues. If there are enough units it might even be worthwhile to have someone onsite to handle all of the day to day management.

More Expensive To Purchase

Multifamily properties can be very expensive. For small investors trying to build a portfolio from the ground up, this can be a big deterrent. Saving up a down payment for a million dollar property is no easy feat for those who are struggling to climb the investment property ladder.

The upside is that it tends to be easier to secure financing for multifamily properties. These buildings come with a higher cash flow and the security of having multiple sources of income. Banks view multifamily properties as a safer investment making it easier to get a loan approved.

Less Diverse Portfolio

Multifamily properties put all your eggs in one basket. If the area becomes less desirable and the building depreciates, it will affect the value of a larger part of your investment portfolio. People may start leaving the neighborhood and you may have to lower the rents in all of your units just to keep them occupied.

Smaller investors who may only be able to afford one multifamily building, should err on the side of caution when choosing the right property. Investors with large portfolios can afford to ride out the storm because they have other properties still bringing in strong income. But if 100% of your investment is affected it will be much more difficult to stay afloat until conditions improve.

Having multiple single family homes spreads out the risk. Having diversity built into the investment portfolio makes it easier to cope with setbacks if something were to happen to affect your ability to attract tenants. The building itself can also be compromised and owning multiple properties makes it far less likely that your whole investment would be affected.

Higher Expenses

Multifamily properties are more expensive to maintain. More tenants in one building means more people using it and more things getting broken. There are generally more operational costs with multifamily properties.

In single family homes, the tenant is often responsible for their own yard and driveway but in multifamily settings there are areas which fall under management. Multifamily properties generally have common areas which the property manager is responsible for. These must be cleaned, maintained, and sometimes staffed and can include lobbies, elevators, hallways, parking lots, rec rooms, swimming pools, and outdoor spaces.

Multifamily properties can be very good investments. The increased cash flow, good valuation, and decreased risk make these properties very desirable for most investors. But they are not a source of easy money.

A multifamily property is very costly and requires greater care and better management to keep it secure as an investment. With the right property management tools, multifamily homes can be very good money makers and lucrative investments.