Investment Type

Pros and Cons of Multifamily Housing to Consider Before Investing

Pros and Cons of Multifamily Housing to Consider Before Investing

Many investors start their journey in real estate with single-family homes. It is a great place to start, but soon after, many investors want to move onto the next big thing. The next step for investors is often multi-family housing. In this blog, we will talk about the pros and cons of multifamily housing and what you need to consider before making the jump.


Subscribe to our Newsletter

Multifamily Housing – What is it?

At its most basic level, a multifamily property is a structure with multiple units where multiple families live. Sometimes you will see this referred to as a multi-dwelling unit (MDU). This structure could be a duplex, townhouse or condo, or an apartment building.

One of the first questions people often ask is what makes a multifamily housing property a commercial property. Generally, anything larger than 5 units (or doors) is often considered commercial real estate. If the property qualifies as a commercial property, it will require a commercial loan.

The Benefits of Multifamily Housing

Economy of Scale

The economy of scale is one of the biggest advantages of multifamily housing versus single-family housing.

This economy comes in a number of areas:

  • Time: The time and energy to grow your business focusing on multifamily will be far less than going the route of single-family homes. There are many individuals who have amassed large numbers of units in a relatively short amount of time. The work of locating a property, running the numbers, completing the due diligence, and closing is not insignificant.
  • Management: It is simply far easier to have 8, 10 or even 50 tenants all in one location rather than dealing with the same number of tenants spread out over a large geographic area. Not to mention with a large number of units in the same locale, you increase your negotiation power with your property manager.
  • Maintenance/Repairs: From the moment the paperwork is signed, there will be things that need attention. With multifamily housing, everything resides under one large roof or area. Not only do you save time with travel, but there is the expense side as well. The cost of repair or replacement for a roof or other big ticket items will be larger. But the cost will be far less than replacing these same items individually.



Special Offer from our Sponsored Link Above

Risk Profile

Lowering your risk profile is another significant benefit with multifamily. With a single family rental unit, it is either occupied or it is not. That means, if you have a mortgage, you will need to cover the cost of the mortgage (and other expenses) without a rent payment coming in to offset the expense. With multifamily, there are more tenants to cover your mortgage and other expenses.  If you own a 12-plex and 3 tenants have moved out, there are still 9 paying tenants. This provides protection for the investor.

Appreciation

Appreciation is yet another great benefit of multifamily investing. In the single-family arena, you are highly dependent on how the properties around your property are valued, even if you do substantial improvements to the property. With multifamily, more options exist and they are under your control as the owner. A good cost-benefit analysis is needed for this activity and perhaps even conversations with your tenants. But if you are able to identify areas of improvement that allow you to charge more for rent or bring in additional streams of revenue, then you have improved your net operating income. And, if you continue to maintain your multifamily unit, it will retain its value.

Considerations with Multifamily Housing

Tenant Disagreements and Turnover

Because tenants will live close to one another, the likelihood of tenant disagreements rises substantially. This will come in any number of forms – noise, clutter, smells, parking. Part of this can be mitigated with good tenant screening, but no matter what, this will be a thing that will occur and it can contribute to turnover.




Special Offer from our Sponsored Link Above

Down Payment and Cash Reserves

Multifamily properties generally have a much higher price tag than a single family home. As a result, it means it will require a larger down payment. It is not uncommon to expect to put down 20-25% on the property. The payment is also larger because you are not living in the property and lenders see that as more risk. Additionally, you must be prepared with cash backing or cash reserves. In most situations the conditions just mentioned apply, but this is not always the case. There are other great opportunities in the area of creative financing that could require very little or no money out of pocket. Those are really hard to find, requires you to think outside the box, and they may not apply to everyone. But, this is the focus of another future blog.

Market Size for Multifamily Housing

The National Multifamily Housing Council (NMHC) released an updated report in November 2016 that there are nearly 27 million households that rent a multifamily unit. That is 61% of households as compared to 35% renting a single family home. The growth in multifamily housing development is growing. Freddie Mac reported that Multi-family development building in 2016 was at the highest levels since the 1980’s. The growth of this sector is expected to continue in 2017 but at a slightly slower rate. Vacancy, highly dependent on the region, is overall expected to rise slightly throughout 2017 to around 5%.

Multifamily Housing – Is it for You?

As many can attest, multifamily housing, when done right, can be quite profitable.

Do your homework. Research and verify all areas of past performance. Prepare a list of the potential areas for improvement and assess the value those improvements would bring. Bounce your concerns off of skilled colleagues who have done this before. Make the right decisions going in.

Pros and Cons of Multifamily Housing

ProsCons
- Economy of scales
- Lower risk profile
- Control for appreciation and value
- Potential for tenant disagreements
- High price of entry

Jeri

Are you looking for a simple way to view your global cash flow?
We can show you how.

Request a Demo
 
What else do you want to know about?
 
Stratafolio Thank you for your visit. 
Follow me

Jeri Frank

Founder and CEO of STRATAFOLIO, real estate investor, cyclist, cat lover.
Follow me

Also published on Medium.

Summary
Pros and Cons of Multifamily Housing to Consider Before Investing
Article Name
Pros and Cons of Multifamily Housing to Consider Before Investing
Description
Multifamily housing is a popular investment vehicle for many investors. In this blog, we take you through some of the pros and cons to consider as you start
Author
Publisher Name
STRATAFOLIO
Publisher Logo

4 thoughts on “Pros and Cons of Multifamily Housing to Consider Before Investing

    1. Thanks, Nia, for the question. Without knowing more about the specific situation and type of roof you have, it is a bit hard to answer. In general, there are economies of scale in repairs. But, larger complexes typically have flat roofs and there are additional factors that have to be taken into account with flat roofs. Vibration and dripping water from HVAC units can create additional maintenance issues that slanted roofs do not have. Hope this helps! Take care – Jeri

  1. I hadn’t really thought about it, but it does make a lot of sense that you could lower your risk profile with a multi-family home. As is pointed out, with a single family home it is either occupied and you’re earning money, or it is not. At least with a multi-family home like an apartment complex you can have some places filled and making you money while others are vacant.

Have something to share? We would love to hear from you!

This site uses Akismet to reduce spam. Learn how your comment data is processed.