Top 5 Reasons to Invest in Multi Family Property
The beauty of real estate investing is the many strategies that can be successfully used to generate a high return on investment. Some strategies include flipping houses, developing properties, maintaining rental properties, and many more. Acquiring rental properties is the preferred method of investment among those looking for an additional source of monthly income with a slow yet steady appreciation in the value of their portfolio. There are two main forms of rental property investments, single-family and multi-family. Single-family properties are homes that are built on a single lot, with no shared walls and often have a garage that is either attached or detached. Multi-family homes are homes with two or more units, taking shape in a variety of ways such as a townhouse style with multiple floors or range in size from a duplex to a four-plex.
When looking for an investment property, multi-family homes are the most ideal option for a several reasons. For one, multi-family properties allow owners the benefit of enjoying the units through a variety of ways. For example, many owners decide to live in a unit, and rent out the others for income, or simply rent out all units. Multi family properties are also ideal for multi-generational households because they allow family members to live within the same building yet still have the luxury and privacy of their own unit. Investing in multi-family properties is a powerful investment strategy to generate a reliable cash flow for months on end. But that’s just one of the many reasons to consider: here are our top five reasons you should invest in a multi-family property!
1. More Cash Flow
Whether it’s a small property with a few units, or a high rise with a multitude of units, multi-family properties produce excellent sources of cash flow. The top reason to invest in multi-family property is it’s potential to earn high levels of cash flow. If a single-family property generates a single months income, then why not invest in multifamily property producing multiple streams of monthly income? Multi-family properties are comprised of multiple units which provide the owner the opportunity to enjoy the benefits of earning multiple streams of income, emanating from a single investment. Because multi-family investments produce high cash flows, they are generally valued higher than single-family homes. Unlike single-family properties, where income is dependent on tenants, multi-family properties provide leeway when it comes to occupancy. Multi family properties have numerous units, therefore income is not lost when a single unit is vacant. The economic loss created by a vacant unit is alleviated by the other units that are occupied, guaranteeing a reliable and steady monthly cash flow.
2. Easier to Finance
It is widely accepted that multi-family properties are easier to finance because mortgage lenders regard multi-family rentals as low risk real estate investments because of their abilities to generate high income through rents. Mortgage lenders also recognize that there is a very low chance of having 100% vacancy, therefore, the investment will always generate some form of return. Lenders generally favor financing multi-family properties because they generate a strong month to month cash flow and there is always a high demand for housing, specifically in Southern California.
Multi-family properties are broken down into residential and commercial properties. Four units or less is a residential property while properties with five units or more are commercial properties. Commercial properties qualify for a commercial loan, which is significantly easier to obtain because they depend mainly on the investment (the building itself) rather than your own personal assets and liabilities. Commercial loans provide more flexibility on profitable properties and typically do not get reported on your personal credit. Additionally, banks usually aim to limit the amount of loans you have, limiting the number of rentals you can obtain. However, multi-family housing allows investors to own more rental units with fewer loaned dollars.
Appreciation of property can depend on a variety of factors, however, multi-family properties provide the investor with control over the appreciation of their property. Appreciation is the increase in value of your real estate investment over time. When the value increases, it is considered to have appreciated. Appreciation of real estate can occur in two ways, the first is through market appreciation and the second is through forced appreciation. Choosing the right property to invest in and managing it the right way provides investors with the ability to “force” appreciation. Multi-family real estate enjoys generally higher appreciation than single-family residential real estate.
4. Tax Breaks
Many investors favor multi-family properties because of the consistent market and significant financial return on investment. Along with providing a supplemental rental income, multi-family properties provide a number of tax benefits for investors. Rental real estate provides more tax benefits than almost any other investment. Investors that take advantage of the tax breaks of their multi-family properties increase their short term cash flow while maximizing their long term tax savings. Interest is often a landlord’s best deductible expense. Examples of interest that landlords can deduct include mortgage interest payments on loans used to acquire or improve rental property and interest on credit cards for goods or services used in rental activity. The cost of rental property repairs, such as repainting, fixing floors or leaks, plastering, and replacing broken windows, are also fully deductible. You can also deduct the wages of any workers hired who perform services for your property as a rental business expense. You can deduct those wages whether the worker is an employee, such as a resident manager, or an independent contractor. You can also deduct any premium you pay for insurance on your property, this includes and is not limited to flood insurance, theft, fire, and landlord liability insurance.
5. Diversifying Portfolio
Owning rental property to produce a steady stream of rental income is the most common way to start investing in real estate. Aiming to have a diversified real estate investment portfolio is the best strategy to ensure financial security. A diverse portfolio means that your capital and investments are distributed throughout different types of real estate properties and different housing markets. The benefit of maintaining a diverse portfolio is to reduce the risks associated with one type of investment property or real estate market. Spreading investment capital across a spectrum is how property investors balance risk and reward in their investment portfolio. An example of this is if you were to own a number of investment properties, and something negative were to affect one property, it probably won’t affect the other properties. Therefore, the negative impact only affected one fraction of your investment rather than your entire investment, thus, you have a better chance at successful real estate investment when you maintain a diverse portfolio. So, the question that now stands is how can you build a diverse investment portfolio? The answer is simple, invest in multifamily property.