Which is the better real estate investment: a single family home or a multifamily property? It’s a question that pops up frequently in the real estate investing world, with a somewhat surprising answer. Investing in a single-family home—buying it and then renting it out—is a common practice. It’s a pretty straightforward concept and easy to execute. But in many cases, investing in a multifamily property might actually be more reliable and profitable.
If it’s a better investment opportunity, why aren’t more people taking advantage? Many times investors see the idea of owning an apartment building as overwhelming, or too foreign a concept to even investigate. But with the potential for security and steady income, multifamily investing has grown in popularity over the last few years.
Here are four reasons multifamily is the investment of choice in 2022.
Stability, Stability, Stability
As the market remains unpredictable, investors are looking for something that provides consistent income. If you’re renting out a single-family home and the tenants suddenly aren’t able to pay their rent anymore, you’re still on the hook for the mortgage as the owner of the house.
But in a multifamily property, there will always be income. Rocket Mortgage captures it well: “Multifamily properties offer multiple rental units to rent out [and thus] can also generate several multiples’ worth of additional income in the end. Likewise, having the ability to rent out several units versus a single unit also provides real estate investors with multiple opportunities to reduce vacancy rate, allay their expenses and offset general risk.” With reliable and ongoing income—such as regular cash flow, appreciation, mortgage pay down, and annual tax advantages—this investment is notably less risky.
The pandemic has only accentuated this stability. While COVID-19 shook the economy to its core, one thing remained strong: investments in the basic need of shelter.
It’s Easier To Build A Portfolio
Which makes more sense logistically: buying 20 single-family homes or one 20-unit apartment building? It’s certainly easier to secure one loan, oversee one inspection, and work with one seller. The alternative is working with 20 different sellers, with 20 different loans, and managing 20 different properties at multiple addresses. It’s significantly simpler to buy one property with 20 units.
This strategy is also much easier to scale. Twenty properties is a great start, but if the eventual goal is 100 or 500 units, it’s close to impossible to manage that number individually. But managing 5 buildings of 100 units each is actually doable.
You Don’t Have To Be The Property Manager
When you’re managing a handful of rental properties, many times it’s cost-prohibitive to hire a property management company to handle day-to-day operations. But with an apartment building, the stakes are different. As Investopedia states: “The amount of money that multifamily properties produce each month gives their owners room to take advantage of property management services without the need to significantly cut into their margins.”
It’s More Affordable Than You Think
Buying and owning an apartment building might sound cost prohibitive, but in reality, multifamily property investments are quite attainable for many individual investors. Many apartment and office buildings are owned by a group of individuals, thus opening up the opportunity. Usually, there is one general partner (GP) that manages all aspects, from finding the building to maintaining it. The GP then finds limited partners to join the investment who write a check to join the limited partnership and then watch it (hopefully) appreciate.
Best part? This can be done with relatively modest investment amounts. Many limited partnership investments have minimums around $25,000, a pretty attainable number for those looking to dip their toe into the multifamily investment pool.
As we continue to emerge from the pandemic and anxiously wait to see how the economy will shake out, it’s a good time for investors seeking security and scalability to look into multifamily real estate investments.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.