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Is Buying a Multifamily Property a Good Investment?

Apartment BuildingWhen deciding whether to purchase a multifamily property (and what kind to purchase), it’s important to review the benefits and disadvantages of investing in multifamily properties. 

While we’ll address this in a traditional pros and cons fashion, it may be equally effective to look at multifamily investing through a different lens; by analyzing its risks, benefits, and the required time commitment involved. To put multifamily investing into a reasonable context, it needs to be compared to the alternate investments one could purchase say, stock in a well-known company.

For instance, if we compare purchasing a 10-unit apartment property for $1 million to purchasing $1 million of stock in a blue-chip company, we can certainly say that there will be more time commitment, and potentially more risks when purchasing the building. 

However, there’s also the potential to make significantly more profit; especially due to the fact that most apartment buildings are purchased with loans. Instead of using $1 million cash to purchase an apartment building, an investor only would need a 25% down payment or $250,000 cash for the $1 million apartment building. 

Of course, stock in a company is only one alternate option; investors can buy bonds, invest in a property syndication, invest in a private money fund, or even purchase single-family homes or other types of commercial properties however, all those comparisons are beyond the scope of this article.

With that being said, we’ll get straight to the pros and cons:

Pros of Multifamily Investing

  1. More diversification and less vacancy risk than investing in single-family homes; for instance, one vacancy may not be a huge deal for an multifamily investor.
  2. In general, multifamily investing often results in a greater chance for higher returns than investing in “safe” stocks, though in practice, this completely depends on market conditions and investor choices.
  3. Investors can use a loan to purchase an apartment property, often with as little as 25-30% down (and sometimes less) tax deductions and incentives, including:
    1. Mortgage interest tax deduction
    2. Accelerated depreciation via cost segregation studies often allows investors to take a large portion of their property’s value as depreciation within the first 5-10 years of ownership
    3. 1031 exchanges allow investors to defer paying capital gains taxes by ‘exchanging’ one piece of multifamily or commercial real estate for another, as long as the new property is of equal or greater value to the previous one
    4. Apartment owners can generate supplementary income from laundry machines, vending machines, additional parking spaces, pet fees, or renting space to commercial tenants.

Cons of Multifamily Investing

Apartments can be notoriously difficult to manage, especially for first-time owners. Many owners choose to outsource this to a property management company, which will likely charge between 10-20% of rents (though flat fee arrangements are also often available).

Apartment owners can face additional liability risks, especially for larger multi-story complexes, as well as complexes with pools, gyms, and other areas where accidents may be more likely to occur.

Safety inspections and legal compliance issues can be both expensive and time-consuming (something single-family home investors rarely have to deal with). 

Unlike stock in Google or Coca-Cola, apartment buildings are not particularly liquid and can be difficult to sell. Even in a seller’s market, it can often take a few months to find a suitable buyer and close the deal. In a market where prices have fallen significantly, it may often be more desirable to hold on to the property for a few years until prices rise again.

This gives you a basic guide to multifamily investing.  The idea is for broad stroke analysis. However, as a first-time or even a seasoned professional in investing, these are easy items to forget and overlook. 

In the end, does the deal make sense?  Does the property make sense?  Is the money right?  Is the financing right?  The right financing partner can also assist (as they have a vested interest) in helping you craft the right deal on the right property.

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