If you’re looking to expand your investment portfolio, you might be interested in what multi-family real estate can offer. Multi-family investments have proved popular over the years, particularly because they seem less complicated than investing in retail, hotels, office space, and other types of real estate.
As with all investment opportunities, though, it’s crucial to weigh the potential risks and rewards. In this guide, we break down the pros and cons of multi-family investing to help you determine if it’s right for you.
The Pros of Multi-Family Real Estate Investing
There are several benefits to investing in multi-family real estate. Here are some of the most notable.
Significant, Reliable Cash Flow
One of the biggest advantages of a multi-family real estate investment is the dependable and substantial cash flow it generates. While single-family investments house just one tenant (or a single group of tenants), multi-family investments are home to multiple groups of tenants paying rent. This means if one unit becomes vacant, you still receive cash flow from the other occupied units.
Of course, it’s vital to do your own research to ensure the rental income of a multi-family property will exceed its net operating costs. PropStream’s reporting tools can help you determine information such as estimated property values, rental income, equity, growth rates, and more!
Easier To Secure Financing
This significant and reliable cash flow also makes multi-family properties easier to finance. Because banks deem them to be less of a risk, you may even be able to lock in a lower interest rate.
With multi-family real estate, you can also secure a single, straightforward loan, no matter how many units belong to that property. If you were to buy multiple single-family rental properties, you would need multiple individual loans.
Highly Scalable
Investing in multi-family real estate also allows you to grow your investment portfolio at a faster rate. You'll have to acquire single-family rentals one by one. In contrast, multi-family properties allow you to scale your portfolio by multiple rentals at a time.
Purchasing multi-family real estate can also provide a great stepping-stone toward commercial real estate investing. Multi-family properties with five or more units begin to fall under the category of commercial real estate — an area that provides even greater cash flow opportunities.
Long-Term Value
The value of single-family properties is often tied to factors such as housing trends, developments within a neighborhood, or what families find enticing.
The value of multi-family real estate, on the other hand, comes down to one important factor: its income-generating potential. Because these properties are primarily bought and sold as forms of investment, they tend to have more stable long-term growth.
The Cons of Multi-Family Real Estate Investing
While there are plenty of benefits to investing in multi-family real estate, it isn’t without its risks. Here are a few key downsides.
Higher Upfront Cost
Multi-family real estate investing might be lucrative, but the upfront costs can be significant. Investors must be prepared to provide a down payment of approximately 20%, depending on the market and size of the building. This high initial cost often prevents investors from taking the leap. They also might need some initial repair and or renovations to bring them up to comparable properties in the neighborhood.
Competition
Like many areas of real estate investing, multi-family properties can be highly competitive — particularly in a good rental market. As a newcomer, you may find yourself up against more experienced multi-family investors. This competition can push property prices even higher.
PropStream’s 120+ search filters can help you find motivated multi-family property sellers before they go to market. Targeting properties based on certain situations (such as vacancies, pre-foreclosure, liens, and more) can help you get a leg up on the competition.
Management Responsibility
Investing in multi-family real estate can provide you with significant cash flow, but it also adds significant responsibilities to your plate. Managing multiple properties requires a lot of time, attention, and upkeep. Day-to-day responsibilities include collecting rent, addressing maintenance requests, and being on call for emergencies.
Because of this, investors often hire property managers to take care of many of these landlord responsibilities. This, of course, eats into your profitability.
Is Multi-Family Real Estate Investing Right for You?
Investing in multi-family real estate can help savvy investors rapidly scale their portfolios and benefit from reliable cash flow.
Therefore, it’s easy to see why investors are flocking to the multi-family property market. As with all types of investments, however, multi-family properties aren’t without their risks. Always do your homework to ensure a multi-family property suits your needs before you jump in.
