Buying and managing properties as part of your rental property portfolio can be extremely profitable, especially on large scales. But even the most robust property portfolios must begin with the acquisition of a single property.
In the real estate world, multifamily properties are highly scalable and highly advantageous. Having a single building with 10 units (or even 2-3 units) can provide you with stable, consistent income – and as long as you have a good management plan in place, it can be a lucrative investment.
The question is, does it make sense to start your property portfolio with the investment of a single multifamily property?
The Short Answer: Yes, You Can
If you’re looking for a quick answer, here it is yes, you can begin your real estate investment journey with a multifamily property. There are some amazing benefits to owning a multifamily property, but there are also some unique drawbacks.
These advantages and disadvantages tend to be enhanced when this is the first and only property in your portfolio.
The Pros and Cons of Starting With a Multifamily Property
Let’s take a look at these pros and cons to see how they should influence your decision as a first-time real estate investor.
We’ll start with the pros:
- More income. Multifamily properties tend to be associated with more income. If a property is associated with multiple units, and each unit has a paying tenant, you can instantly multiply the amount of money your property generates every month. Of course, this is partially offset by increased ongoing expenses, but generally, more units means higher profitability.
- Vacancy risk mitigation. One of the biggest threats to your profitability and success as a real estate investor is an ongoing vacancy. When your property is vacant, you’ll still be paying expenses without any supplementary income to offset it; but in multifamily properties, the risk of vacancy is much lower. If only one of your units is vacant at a time, the other active units can make up for it.
- Easier financing. In many cases, it’s easier to secure financing for a multifamily property than it is for a single-family property. That’s because income consistency tends to be better for a multifamily property.
- Living options. Depending on your budget and needs, multifamily property investing gives you the option of having a living space for yourself. For example, you can buy a duplex, live in one unit, and rent the other unit out to cover your mortgage.
These are some of the cons:
- Higher upfront costs. As a newcomer to the real estate investing world, you may not have much liquid capital to work with. Multifamily properties are associated with higher prices and higher upfront costs. It may be more feasible to seek a single-family property as your first acquisition.
- Greater maintenance requirements. As you might imagine, increasing the number of units has the potential to increase your maintenance needs and repair costs. You’ll also have a greater number of people who might contact you with complaints, questions, and requests.
- More competition. Because multifamily properties are capable of generating significant income and are highly scalable, they’re associated with greater competition. This can push prices to an unattractively high point and lead to annoying bidding wars that interfere with your purchasing plans. If you’re not a competitive person, or if you’re intimidated at the prospect of being aggressive in your real estate decisions, this can be an especially significant turn off.
- More complexity. As a new real estate investor, you may not have much expertise or confidence in your property management abilities. You may not be familiar with how to evaluate property conditions, how to conduct regular maintenance, and how to make sure a property flourishes over the long term. Multifamily properties are more complex than their single-family counterparts, so you’ll need to think carefully before choosing to proceed.
When Starting With a Multifamily Property Makes Sense
There are many cases when starting your real estate investment journey with a multifamily property makes perfect sense.
For example:
- When you’re living in the property. Living in one unit of a multifamily property is an excellent way to establish yourself in the real estate world. It’s a way of simultaneously buying a property for yourself and your own needs while also getting exposure to the rental property investment world. In a best-case scenario, you’ll be able to charge your other tenant(s) an amount of money that covers, or nearly covers your mortgage, practically allowing you to live for free.
- When you have the capital. If you have lots of extra liquid capital, many of the disadvantages of a multifamily property are offset. You can afford the upfront costs, deal with extra maintenance needs, and not worry about initial vacancies or other expenses.
- When you want to prioritize income stability. If income stability is your biggest goal, multifamily investments are strictly advantageous over single-family investments. There’s no way around it.
- When you have a plan for maintenance and support. One of the few downsides of multifamily properties is that they can be more complex and difficult to manage. But if you have a property manager, or another support plan in place, this weakness can be easily mitigated.
- When you feel confident as a real estate investor. Multifamily properties can be challenging, but they shouldn’t be intimidating. If you’re confident in your real estate investing and management abilities, don’t be shy about starting with multifamily.
However, if you’re working with limited capital, if you’re generally risk averse, or if you just want to start this journey as simply as possible, a single-family property might be better.
Your first real estate decision is typically the hardest, which is why it’s important to work with experts as you evaluate your financial position and decide how you want to move forward. Real estate agents and property managers can give you the expertise and perspective you need to make your next decision confidently. If you’re ready to take the next step in your real estate investment path, contact us for a free consultation today!
Michael is Green Residential’s Vice President. He helps to keep the team organized and running smoothly. Prior to joining Green Residential, he spent 12 years working at Cadence Bank in the mortgage loan servicing department, where he specialized in loan audits, modifications, and bankruptcy-related issues for the mortgage portfolio.
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