A multifamily home is a single building that accommodates more than one family. Also called apartment complexes, multi-family homes provide an efficient and cost-effective living facility. Across the US, single-family homes hold tremendous popularity. Thus, it should not surprise us that between 2016 and 2018, the number of owner-occupied single-family homes increased to 68.6 million.
However, rising housing prices and evident housing crises have brought dynamic shifts in the housing market. As such, people have started preferring multifamily houses more and more. In fact, as per RealPage’s report, the net demand for apartment spaces reached 712,899 units in March 2022. Such a dramatic rise in demand for multifamily houses tells us that investing in multifamily housing is lucrative and could provide excellent returns in the long run. However, one should know the pros and cons of investing in multifamily housing.
Pros of Investing in Apartment Spaces (Multifamily Homes)
1. Cash Flow
Cash flow through rental income is one of the biggest benefits of investing in multifamily homes. Contrary to single-family homes, apartment spaces have multiple units with multiple tenants paying rent. Even if there’s a vacancy in one unit, investors will still have cash flow from other units. However, one must commence due diligence of the property before actually investing in a multifamily project.
2. Easy Finance
While the market value of multifamily homes will almost certainly be higher than single-family homes, as far as investing is concerned, it is comparatively easy to secure finance for multifamily properties. Since there is a constant cash flow from an apartment building, banks are significantly less hesitant to provide financing.
For an investor, diversification holds a high priority in de-risking assets. Thus, investing capital in multifamily properties can be advantageous for expanding an investment portfolio. It offers an opportunity to move toward higher commercial real estate investment. Needless to say, commercial real estate offers higher cash flow.
4. Tax Benefits
Multifamily investment properties offer key tax benefits. As a matter of fact, investors can deduct maintenance and operation expenses like property management fees, utilities, maintenance & repair costs, insurance premiums, and any marketing costs. Furthermore, investors can take advantage of real estate depreciation and cost-segregation tax benefits.
Cons of Investing in Apartment Spaces (Multifamily Homes)
As mentioned earlier, multifamily investment properties have recently witnessed significant demand. It has drawn interest from seasoned investors, creating intense competition for multifamily properties. However, the major disadvantage of this trend is it dissuades novice investors from the market. Since established investors can secure finance quite quickly, first-time investors find it challenging to invest in real estate as they have to form a partnership with other investors to secure finance. Moreover, first-time investors are hindered by a lack of key insights into the real estate market.
2. Challenges in Management
Even if an investor can beat the competition and secure adequate financial arrangements for a multifamily property, managing the property after the purchase is a huge task. Managing multiple units is a tremendous responsibility and requires time, attention and maintenance. A tip for novice investors, invest in a limited number of units, say one or two. You do not have to invest too much expertise and time.
3. High Initial Cost
Although securing finance for multifamily homes is relatively easy, the initial high cost of these housing units remains a major hurdle. Even smaller apartment buildings can cost millions in metropolitan areas like New York and San Francisco. While banks are happy to provide loans for multifamily homes, investors will have to pay roughly a 20% down payment. As a result, the entire multifamily investing becomes somewhat arduous.
There are some major cons to investing in multifamily houses; although their lucrative benefits outweigh the disadvantages, one must conduct thorough research before investing in multifamily properties. It is essential to consider the location, resale value, and economic scenario of the locality.
Homz Global, the first national housing company in the US, is developing wellness-centric multifamily housing communities across crucial suburbs of the US. Homz communities will be developed across strategic locations, providing fuss-free access to essential amenities like schools, colleges, universities, recreational facilities, public transport and healthcare. As a result, it will provide an affordable housing solution and high-quality living.