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Investors are continuously on the prowl for the next big venture, and as real estate markets across the U.S. and Canada have largely returned to pricing consistent with market fundamentals, the next winning real estate investment might just be multi-family properties. Multi-family properties include apartment buildings, duplexes, quadruplexes and any other building containing more than one rental unit.
Here are six reasons why purchasing and flipping multi-family properties might just be the way to go for investors seeking better returns on investment in today’s real estate market.
Greater Cash Flow – Perhaps the most obvious reason multi-family properties could be more profitable than single family is greater cash flow from several units vs. a single unit. Also, the risk of vacancies wiping out 100% of rental income is decreased with multiple units each paying rent.
Less Urgency to Sell – Experienced investors know to have an exit strategy, whether flipping or holding onto the property as a rental until the right market to sell. When a quick turnaround sale fails to happen, holding on to a single-family home often means sacrificing profits when market rents fail to cover expenses. But with greater cash flow there is a greater chance for profitably holding the building for a year or two as the need arises, with a multi-family unit. Also, if times grow really tough, an investor could find herself occupying one of the units while still collecting income from the others.
Economies of scale – The owner of a quadruplex has only one roof to replace and one set of mechanical systems to maintain, rather than four… just saying.
Ease of Financing – The underwriting process and loan qualifications for buildings with 2-4 units are often the same as those for single family dwellings, so why buy a SFD when a triplex is just as attainable? Buildings with more than four units, however, are technically considered commercial properties and are financed by commercial loans.
Increased Marketability – Selling multi-family dwellings opens up the pool of buyers to include owner-occupants as well as investors. Even savvy homeowners who do not consider themselves investors know it makes perfect sense to have someone else pay part (or even all) of their mortgage. Nor is it a foreign concept to homeowners; plenty of them have rented out rooms or basements ing their homes to gain extra income, particularly in the aftermath of the Great Recession. Multi-unit homes can be a low-maintenance investment opportunity even for those who do not think of themselves as real estate investors.
Tax Advantages – Multi-family owners who also occupy the property can take advantage of tax benefits applicable to both an investor and a homeowner. For example, homeowners have a tax exemption from capital gains taxes on the first $250,000 ($500,000 for married sellers) gained from selling a primary residence occupied for more than a year. Meanwhile investors have a tax advantage to deduct repairs on their rental properties each year… why not buy real estate that confers both types of tax advantages? And while earnings from flipping real estate is taxed as normal income, the greater cash flow from multi-family properties makes holding for a year more viable, to either avoid taxes altogether for those occupying the property or to pay the lower capital gains rate for non-owner-occupants.
But with these benefits come some risks, of course. Multi-family buildings are inherently more expensive, which means more money wagered in the investment. And when all of the neighbors have the same landlord, they will take complaints about neighboring residents to the landlord/property manager instead of the police or other authority. One problem resident can cause a mass exodus of other tenants in the building, leaving the landlord with an expensive mortgage to pay and no rental income. And an infestation in one unit generally means an infestation in all units.
The number of renters has increased in the last few years, as some of the shine was rubbed off of homeownership after the collapse of real estate markets nationwide from 2007-2011. Catering to a renter-heavy market may prove to be a winning strategy, for investors able to find affordable multi-unit properties with good cap rates. Be prepared to make some repairs and renovations however, to buy at an affordable price and create equity faster in order to flip or secure higher rents.
Do you own any multi-family dwellings? Do you flip multi-family dwellings or hold them? In your opinion, which is better residential or commercial? Why?
