Many people who invest in rental properties choose to buy multi-family properties such as apartment buildings or residential duplex, triplex, or quads, and a lot of them wind up making a lot of money. Still, buying multi-family properties isn’t for everyone, and it may not be the best way to get started in real estate investing. Is it right for you? To make the right decision, carefully consider these pros and cons of buying multi-family properties.
Pros of Buying Multi-Family Properties
Let’s begin by examining the pros of buying multi-family properties:
CASH FLOW
Keeping a healthy cash flow is a perennial challenge for those investing in rental properties. But with multi-family properties, you have a reliable monthly stream of income having tenants pay your mortgage and some. Rents are predictable and in strong markets like South Florida for example, units can be turned over easily and re-leased to ensure steady continuous cash flow. You can even generate income beyond rents. The availability of ancillary income sources can considerably and directly impact the value of the property equating to greater growth in profit! A caveat to this is ONLY IF IT’S WELL MANAGED. If a the property is well maintained and managed you have far less expenses than if not, meaning more money in your pocket.
MORTGAGE SIMPLICITY
Buying multi-family properties also streamlines the mortgage end of things. You have to deal with only one mortgage for multiple tenants instead of multiple mortgages for single-family dwellings to accommodate an equivalent number of tenants. So you save time, a ton of paperwork, and possibly money.
LESS RISK
Multi-family properties also present less risk, especially with respect to vacancies. Because of the multiple units (at least two), the risk of total vacancy is extremely low. If a tenant moves out, the other remaining tenants will keep your cash flow going. Further, most of your tenants will pay rent on time (hopefully you screened them well to pick good ones), and, again, that will make up for the one or two tenants who tend to pay late.
BETTER LONG-TERM VALUE
The value of multi-family properties is based primarily on their income potential. They aren’t subject to fads and tastes when it comes to price and value. So most of the time, they are capable of providing solid growth in long-term value.
Let’s face it, what it comes down to is simple: Everyone needs a place to live! Housing is a foundational and basic human need– a type of demand that will never go away, even in a pandemic or economic downturn like we have experienced.
Cons of Buying Multi-Family Properties
Now, let’s examine a few of the cons:
GREATER INITIAL EXPENSE
Obviously, buying multi-family properties means that you’ll have a bigger initial cash outlay and will require a much bigger mortgage. And this means that multi-family properties may be cost-prohibitive for people just getting into the business.
MORE TIME-INTENSIVE
Multi-family properties will take up a lot more your time. More tenants mean more maintenance and more repairs to make, which all takes more of your landlord time.
MORE EXPERIENCED COMPETITION
While multi-family properties have less competition, that competition is typically more experienced – that is, investors who are pretty savvy because they’ve been in the game for a long time or if not, willing to take on more work and risk. And that means you’ll be up against more experienced competition when it comes to buying and getting tenants.
LESS AVAILABILITY
Owing to the lower demand, multi-family properties are fewer and with less availability than single-family properties. So you will have fewer options and will have to put in a lot more work to find potential properties.
MORE REGULATIONS
Landlords are already saddled with a host of regulations and that regulatory burden only increases with multi-family properties. So if you plan to get into buying multi-family properties, you need to do your homework on these laws and stricter regulations.
Putting It All Together
Multi-family homes can be highly profitable, as well as easier to manage and with less risk. But is buying multi-family properties right for you and your real estate investing business? To make that determination you need to do your research, think about your business model, and look at long-term goals. It’s also a good idea to consult your local real estate agent who has a good handle on the rental market. An agent who has experience with multi-family properties will be your best asset.
