3 Reasons Why Multifamily Real Estate Investing Could Be Right for You
As we continue to navigate through uncertain times regarding real estate and mortgage rates, many investors are considering their next moves. What types of properties do you think about purchasing? One popular ongoing trend is multifamily real estate investing. After all, investing in multifamily real estate is an excellent way for investors to earn high returns and quickly expand their portfolios. That said, if you want to learn more about this investment type and how to get started, keep reading.
Contents of This Article:
- What Is Multifamily Real Estate Investing?
- What Is the Current Outlook for the Multifamily Rental Market?
- 3 Reasons to Invest in Multifamily Real Estate
- Pros and Cons of Multifamily Real Estate Investing
- Essential Tips for Multifamily Real Estate Investing
- Managing Your Multifamily Investment Property
What Is Multifamily Real Estate Investing?
Multifamily real estate investing involves buying a single large property with several separate units within. These large buildings are designed to house several tenants in separate units. Some examples of multifamily buildings include apartments, duplexes, and townhomes.
Although investing in multifamily real estate requires more time, effort, and capital, many investors like it for the large returns. Ultimately, it’s a lower-risk investment that often pays off very quickly. However, that doesn’t erase the need for property management and more expensive repairs. Luckily, your local Fairfax property managers are well-versed in multifamily real estate management.
If you’re thinking about investing in multifamily real estate, there are several factors to consider. Learning more about the investment process is important. But first, why is this the right investment choice for you in the first place? Keep reading to learn more about the current outlook of multifamily real estate and reasons to invest.
What Is the Current Outlook for the Multifamily Rental Market?
Throughout last year, in 2022, we experienced strong and steady demand for multifamily real estate. Much of the demand came from job growth, rising wages, favorable demographics, and an increased number of renters in certain areas. However, demand for multifamily housing slowly dissipated during the last three months of 2022. The reason for the decline in demand is due to higher mortgage rates, pricing uncertainty, and affordability issues.
Nonetheless, as we continue through 2023 we’ll experience strong and steady demand for multifamily housing. After all, more apartments are being built, and prices are leveling out across real estate markets. That said, it’s crucial to recognize the demand for multifamily housing can depend on the market and neighborhood.
Many experts believe that demand for multifamily housing will continue to grow as the year progresses. After all, buying single-family homes is becoming more challenging as interest rates rise and prices are inflated. As a result, people aren’t as quick to move from their apartments, or they’d rather live in rental homes until prices settle.
Aside from the popular demand, here are three reasons why you don’t want to pass up a multifamily real estate deal.
3 Reasons to Invest in Multifamily Real Estate
If you’re looking for reasons to invest in multifamily real estate, there are several. Multifamily investment properties are great investment choices for landlords who want to put in the work to bring in significant returns. Here are three of the top reasons investors choose to purchase multifamily buildings.
- Easier to Finance and Earn Income
- Grow Your Investment Portfolio
- The Market and Time Is Right
Easier to Finance and Earn Income
Although it costs more to purchase a multifamily building than a single-family home, it may be easier to finance. A multifamily property may get approved for a loan quicker than the average home. This is because they generate predictable cash flow each month, and the likelihood of foreclosure isn’t as high.
Along with the fact that they’re easier to finance, multifamily properties can bring in massive returns. For instance, if you own an apartment building with four separate units, you bring in four times the income.
Grow Your Investment Portfolio
Another great reason to invest in multifamily properties is to grow and diversify your investment portfolio. Whether you’re a new or experienced investor, owning a multifamily property can help quickly build a large portfolio of rental units.
Instead of purchasing 20 separate single-family homes, you can expand your portfolio just the same by buying a multifamily property with 20 units. Then, you only need one loan, all of your inspections are in one place, and management is simple.
The Market and Time Is Right
Finally, you may end up buying multifamily real estate because the time is right and the opportunity presents itself. Even if you’re not actively looking to purchase a multifamily building, you could come across a deal that you can’t pass up. Right now, the demand is steady, and the market is competitive–so it’s best to be proactive while shopping for real estate.
Pros and Cons of Multifamily Real Estate Investing
Not every investment is completely perfect. Like most investment strategies, there are some pros and cons of multifamily real estate investing. Here are some of the most noteworthy factors to consider about this investment type.
Benefits of Multifamily Real Estate
- High Returns- With a multifamily rental property, you get monthly income from several units within. As such, you’re bringing in higher returns than you would with a single-family rental.
- Scalability- If you’re trying to grow in the real estate industry, buying a multifamily property is a great start. You can branch out and purchase other types of commercial buildings from here.
- Tax Benefits- Tax benefits are great for any real estate investment. You can write off most repairs, mortgage interest, and tons of other business expenses.
Disadvantages of Multifamily Real Estate
- Higher Start-Up Cost- Compared to other investments, buying a multifamily property is quite expensive. This investment type requires a sizeable down payment and larger loan payments.
- Competition- The competition is high for multifamily real estate, so you may be up against other investors. Prepare to make solid offers if you’re looking at competitive properties.
- More Management- Multifamily rental properties need a lot of management. After all, you’re dealing with several tenants, property maintenance, and the rest of your rental business.
You’ll need solid property management if you have a rental business with multifamily rental properties. That said, many investors hire Fairfax property management companies to ensure their tenants are happy and their rentals are well-maintained.
Next, let’s discuss some more essential tips for investors interested in multifamily housing.
Essential Tips for Multifamily Real Estate Investing
Making smart business decisions is crucial if you’re interested in buying multifamily properties. As such, you’ll want to run a few basic calculations to estimate the profitability of a property. Here are three essential tips to consider before deciding on any investment property.
- Use the 50% Rule
- Calculate Cash Flow
- Determine Cap Rate
Use the 50% Rule
Before buying a multifamily property, you want to calculate how much you can earn. If you don’t have access to the actual expenses and estimated income, the 50% rule works great. Cut your expected rental income in half–this is your estimated expense number. The difference between the two is your net operating income (NOI).
Calculate Potential Cash Flow
Once you have an estimated net operating income, you can calculate the property’s potential cash flow. To find the cash flow, you subtract the property’s monthly mortgage from the property’s NOI. Ultimately, this number can help you determine whether the property is worth the investment.
Determine the Cap Rate
Finally, you’ll want to find the cap rate, which is how quickly you’ll get a return on your investment. To find this number, you divide your annual NOI by the property’s current market value. You’ll want a cap rate of around 5% to 10%. Higher rates can mean more risk, and lower rates can mean low yield.
Managing Your Multifamily Investment Property
Property management is one of the most important factors to consider while investing in multifamily real estate. After all, it’s a lot to manage when you have several tenants in separate units all within one building. So, if you’re considering multifamily real estate investing, think about hiring property management.
Bay Property Management Group offers comprehensive rental management services, including tenant screening, maintenance, rent collection, and more. Whether you have one rental unit or several, we can help manage it all. Contact BMG today if you need rental management in Baltimore, Philadelphia, Northern Virginia, or Washington, DC.