If you’re considering investing in rental property, you’ve probably thought about the prospect of managing a multifamily home. In case you aren’t familiar, multifamily homes are exactly what they sound like; houses that are designed or structured to accommodate multiple families in different units within the home. They come in many forms, including duplexes and triplexes, and apartment buildings are considered multifamily properties as well.
There are many reasons to consider multifamily homes as a primary rental investment, but these aren’t the right investments for everybody. Before pulling the trigger on a multifamily home, you should familiarize yourself with the pros and cons of this property type.
The Pros
Let’s start by looking at the advantages:
- Cash flow. As you might expect, hosting multiple families in one property means you’re going to see a larger cash flow. Assuming each family pays a margin over the actual costs of owning and maintaining the property, each additional family is going to boost your income—and your profitability. Accordingly, you’ll stand to make more of a profit with a multifamily home than you would with a single-family home.
- Loan simplicity. If you’ve ever tried to manage multiple mortgages at once, you know the headache of dealing with multiple loans and multiple lenders. If convenience and simplicity are goals of yours, multifamily homes are ideal. If you purchase a duplex with a single mortgage, you’ll deal with far less paperwork than you would with the purchase of two single-family homes.
- Insurance simplicity. Similarly, when you purchase a multifamily home, you’re only going to deal with one insurance policy. The insurance will be more expensive, of course, but you’ll get the same coverage across each individual unit, and you won’t have to open up multiple policies.
- Risk mitigation. When buying a multifamily home, you’ll face less risk when it comes to tenants; because you’ll be dealing with two, three, or even more units, the risk for a total vacancy is low. Even if one tenant moves out, you’ll have your other tenants to keep your cash flow relatively positive while you try to fill the void. On top of that, it’s highly unlikely that you’ll have multiple problematic tenants at the same time; if one of your units has a problem with paying rent on time, the timeliness of the other units can make up for it. It’s a way of hedging your bets within a single property.
- Competition mitigation. Competition for buying and renting single-family homes is somewhat high, since it presents an easy entry to the real estate investing realm. When you switch to investing in multifamily properties, you’ll have fewer people competing with you on bids and available units to rent. Multifamily homes also tend to be more unique, so you’ll face less immediate competition as well.
- Long-term value. Single-family homes are often priced based on what families find appealing, which can be subjective and fluctuate significantly based on changes within the neighborhood. Multifamily properties, on the other hand, are priced almost exclusively based on how much income-generating potential they have. They’re bought and sold primarily as forms of investment, and therefore have more stable long-term growth (in many cases).
The Cons
Now for the downsides:
- You’re probably already aware that multifamily homes are more expensive than their single-family counterparts. Though you won’t necessarily pay twice as much for a duplex as you would for a single-family home, when you start looking at homes with three or more units, prices can be a real barrier to entry. If this is your first investment property, or if you’re low on cash, multifamily homes may be too expensive to consider.
- Management time. Each unit you have in a house is going to translate to more management responsibilities, and more time for you to spend as a landlord. You’ll be dealing with multiple groups of tenants simultaneously, multiple sets of appliances, and of course, multiple different schedules. Plus, if something goes wrong at the property, it will likely go wrong for multiple units at once, presenting heftier maintenance and repair bills as well.
- Demand for experience. In the preceding section, we mentioned the fact that your competition may decline when opting for a multifamily home over a single-family, but the type of competition you face will also change. Multifamily homes, due to their advantages, tend to be investment targets for highly experienced investors. That means your competition will likely have years more experience than you do—and that might mean you’ll have a harder time finding tenants and pricing your units appropriately.
- Multifamily units are inherently more complicated, and are prone to more strange occurrences. There are more types of complications that can arise; for example, if you end up with a noisy tenant, all your tenants from all your units may suffer, and a structural problem could drive down the value of your property immensely.
- Availability. For many reasons, including lower demand, multifamily homes tend to be less available and less common than single-family homes. This means you’ll have a harder time finding the “ideal” property, and your options are going to be far more limited.
- Regulations. Landlords already have to deal with multiple regulations about how property can be rented; with multifamily homes, regulations are even stricter. You’ll need to do your research beforehand to find out the laws in your state, or else you could risk fines or imprisonment.
Multifamily homes can be extremely profitable (and in some ways, easier to manage than multiple single-family homes). However, they’re also more complicated and challenging. If you want to mitigate some of the risk in managing your own property, and cut back on some of the effort and stress you’ll incur along the way, consider investing in a property management service. Contact Green Residential today to learn how we can keep your multifamily property profitable and handle things like ongoing maintenance so you don’t have to.
Tiffany is the Director of Operations at Green Residential.She has been in the multifamily property management industry for 7 years, serving most recently as an Area Manager in Nashville, TN. Tiffany specializes in all aspects of the property management process.
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