Benefits of multifamily investment include cash flow, passive income, valuation potential and probably tax saving. A multifamily investment can multiply the income with limited incremental cost.
For successful investment in the real estate, it is important to narrow down upon an investment segment that has the potential to grow. With so many options in the market, making the right choice is the challenge.
However, it has been time tested that multifamily Investing is the one investment that is bound to usher in the highest returns, and hence proves to be one of the better investment options.
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MULTIFAMILY INVESTMENT AND MULTIFAMILY REAL ESTATE – WHAT IS IT?
As the term suggests, multifamily investment is putting the investment in multifamily real estate units. In order to understand the value and profile of the multifamily Investing, it is first important to understand multifamily real estate
Multifamily real estate are housing units of different types of dwelling profiles and multiple dwelling units existing in a single building complex, or within any residential complex. It is a category of housing structure that is comprised of buildings with multiple dwelling units. It is commonly referred to as multi-dwelling units.
In a multifamily real estate dwelling complex, each of the dwelling unit is a rentable dwelling unit. The profile of this rentable, livable multifamily dwelling unit can be varied. It may be a cluster of duplexes, triplexes, penthouses, villas, apartment complexes, condominiums town-homes, and such other building units, designed for different family profiles to be housed in.
Multifamily Real Estate offers such varied and versatile options that it makes Multifamily Investing a great investment opportunity for investors looking for profitable, low risk investments. It also gives the investor the option to live in one of their own Multifamily dwelling units. These are referred to as owner-occupied property. Whether one chooses to live in the dwelling unit or rent it out, a Multifamily Investment opportunity in real estate investing is a worthy investment and a great wealth building asset.
ADVANTAGES OF MULTIFAMILY INVESTMENT
There is a misconception in the real estate investment circle that Multifamily Investment is only for experienced real estate investors, and new investors often feel wary of Multifamily Investing. But this is just a myth.
It is a beneficial and advantageous option for all, new and seasoned investors. In fact, it is especially advantageous for new investors looking for a quick boost and impetus in their real estate career and trying to make highly profitable and low risk investments.
Some of the key advantages of multifamily investment offers are:
- With multi dwelling units of versatile profiles, a Multifamily Investing offers the investor the option of living in one unit and at the same time profiting by renting out all the other owned units.
- Renting out the dwelling units helps the investor to bring down the pressure of their mortgage payment. The rentals are earnings that help investors in paying off their mortgage dues.
- In Multifamily dwelling units the amenities are shared between many dwelling units and dwellers. This brings down the maintenance costs for the investor in Multifamily Investing.
- With the option of multiple tenants in a multi dwelling housing complex, the risk of losing out on rental due to vacancy is almost nil because multi dwelling units always have occupancy, even if some units become vacant. Hence losses due to vacancy are considerably lowered or even obliterated.
- Having a structure of multiple dwelling units creates a security cushion for the investor because the occupancy, rentals and sale never become nil, even in the most challenging circumstances. Hence It is considered as “risk averse” or low risk investment. Thus, Multifamily Investment attracts better options of financing, as compared to single-family property.
INVESTMENT BENEFITS OF MULTIFAMILY INVESTING
There are innumerable investment benefits of Multifamily Investing, the primary two being low risk and good gains. Some of the key benefits brings for the investor are -
- Regular and Assured Cash Flow – Multifamily Investing in Multifamily property assures a steady and regular cash flow through rentals, with an appreciating value year after year.
- Generation of Passive Income- Multifamily Investing means investing in a property that appreciates and generates revenue on its own, through rentals once the initial investment is made. Hence it is a great way to generate additional income, without any active involvement.
- Long Term Appreciation of Valuation Potential – There may have been situations of prices falling due to unprecedented occurrences, in the short term. However, in the long-term investment horizon, Multifamily real estate has been known to appreciate. Multifamily Investment in Multifamily property has been observed to be a resilient option that can hold out in events of economic downturns. In the long run, real estate values of Multifamily property continue an upward swing.
- Low Risk and Safety Net – Multifamily Investing is a safe investment. Since Multifamily Property offers budget friendly dwelling units, and a huge range of price, hence, during an economic slowdown, people seek out Multifamily dwellings for rentals. Also, during economic slump, people lose their credit score, and it takes a long time to build it up again. This makes them turn to Multifamily property for accommodation. Hence, Multifamily Investing assures earnings even during economic downslide. This naturally gives the investor a safety net and mitigates the risk of losses.
- Loan Advantage- A major benefit of Multifamily Investing is that it can be purchased with a single, traditional bank loan. Independent, single units require more complex loan arrangements.
- Insurance – Insurance is a simple process in Multifamily Investing schemes. Individual amenities in single family units often increase the owner’s liabilities. Also, insurance companies are well acquainted with the requirements of Multifamily property. Hence an insurance policy for the Multifamily Investing can be drafted out easily, without complications. In fact, a single “blanket” policy to cover all the assets under the same provider, can be obtained in case of Multifamily Investment.
- Scalability Range – It gives the investors opportunity to scale and grow their Multifamily Investing Portfolio from even the smallest of investment.
- Tax Advantages - It Is investing offers great tax advantages. Since most of the investors turn to mortgage financing, hence they can avail of tax deduction for mortgage interest paid. Multifamily properties depreciate over a period, even though the property valuation appreciates. This depreciation can be strategically used to offset a part of the rental income. This is an added attraction for investors.
- Product Diversity - Multifamily is a single classification of a type of real estate. However, under the umbrella of Multifamily Real Estate, the classification offers a huge range and variety of property products with a massive variation of size, structure, design. Hence, Multifamily Investing offers a range of investments from small duplexes or triplexes to bigger properties like purchasing apartment building or investing in private housing or community retirement housing complexes. Multifamily Investing also offers diversity of purpose. It can be done with the purpose of rentals, or for commercial listing in service accommodation or Airbnb or other short-term lease arrangements. Thus, Multifamily Investment offers great diversity of product and purpose, making the investment worth every penny.
- Multiple Investment Opportunities - Multifamily Investing offers diverse and multi targeted investment opportunities. The Multifamily Investing can be done individually, or with a partner, or with a collaboration of multiple investors. It may be done through a syndication that reaps in the profits and benefits, even without active role play in the partnership. A Multifamily Investing offers option for investing in a Multifamily fund with a reach across the country, enabling the investor the opportunity to diversify the location of the Multifamily property. Investing through a real estate investment trust (REIT) is also an option. REIT shares can be traded in stock market. This helps to preserve the liquidity of the investor.
CHALLENGES OF MULTIFAMILY INVESTING
There are difficulties in everything. And so also there are challenges of Multifamily Investing too.
- Complexity of Management Intensity - Multifamily Investing and Multifamily property requires dealing with many individual leases, different types of tenant profiles, diverse and multiple repair and maintenance demands, requests, different modes of bill payment. This requires a complex, efficient and intensive management structure to cater to all demands and all profiles.
- Cost Challenges - Depending on the location, a Multifamily property may prove to be expensive. High cost is one of the primary, and biggest challenges investors face in Multifamily Investment options of Multifamily dwellings. All the prime locations that offer good rental potential, come at an extremely high cost. Arranging finance for Multifamily dwellings can be very daunting. Also, investors competing for the same Multifamily property, hike up the cost.
- Cutthroat Competition - Multifamily property and Multifamily Investing options are highly lucrative for the investors. They attract the small fish and the big sharks equally. Hence, the competition in Multifamily Investment opportunities is intense and cut-throat. The big sharks, land mafia often push the new and small investors out of the market. Big, experienced and powerful investors have finances to pay cash upfront and they also have the capability and strength to waive off many sale expenses and contingencies, thereby making the offer more attractive for the seller. However, new investors are hard pressed for finance. Hence, they cannot offer such waive-offs. For new investors, partnership with experienced big sharks is a good route to learn and establish themselves.
KEY FACTORS OF MULTIFAMILY INVESTING
There are some key factors of multifamily investing to be kept in mind about Multifamily Investing. These key factors can make the difference between a good investment and a bad investment.
- Financial Figures and Cash Flow – Numbers or financial accuracy is of utmost importance in any investment. In Multifamily Investment, investors must focus on the accurate calculations of numbers and financial figures. The financial figures help ascertain the true value of the property and expose its bottom line. An accurate difference between income and expenses is critical information when considering an Investing option. This gives a correct and a reliable picture of the Investing and helps the investor to structure their free cash flow.
- Location – Another critical factor in is the location of the Multifamily Real Estate Dwelling. Location of the property defines how attractive and appealing the property is to prospective and potential tenants, buyers, renters. Properties in high-growth and high-yield areas and in well maintained neighbourhoods, are always in great demand. They attract renters very easily and hence Multifamily Investing in such lucrative location profiles rakes in the profits for the investors easily.
- Number of Dwelling Units In The Multifamily Real Estate Property-
The number of dwelling units a Multifamily Real Estate property offers is critical to the attraction value of the property for all prospective buyers and renters. This also includes the structure and the number of rooms per accommodation. New investors need to focus their attention on mainly three types of Multifamily dwellings. These are primarily Duplex, Triplex, and Four-plex units. These three types of dwellings are the most profitable with the lowest amount of risk. Hence these property structures are safe and viable Investing options. Also, they are more affordable and thus a good option for new investors to begin with.
- Commercial Prospects and Potential Income Generation-
Revenue generation is the most important and critical part of any investment. An investment that does not bring in the harvest, is of no value. Hence, ascertaining the income or revenue a Multifamily property can potentially generate, defines whether that Multifamily Investing option is worthwhile or not. Rentals and Income profiles must be accurately verified.
- 50 Percent Rule – Running the number check for financial accuracy is critical for Multifamily Investment consideration. However, sometimes investors do not have access to all the requisite data. In such a situation, the 50% rule is of great help as it provides a safety cushion to the investor. In the 50% rule, half of the expected income is defined as the safe income.
The Net Operating Income, NOI is the difference between the Estimated Monthly Income and the Estimated Monthly Expense. In the 50% rule, the estimated income is cut down to half. Thus, the financial safety net automatically becomes greater. 50% Rule says that only 50% of the income is to be reinvested on the expenses and all figures be calculated on 50% income only. Hence, in certain special circumstances, when all data is not available, and for new investors in the beginning of their career, the 50% Rule keeps the investor out of risk.
- Costs and Credibility for Financing Options - There are various financing options for Multifamily Investing. There is owner –occupied financing options, in which the rented unit’s income is considered for the lender’s qualifying ratio. The credit score of the Investors is also of critical importance. Investor’s credit score is a major consideration when contemplating financing options for Investing. Financers primarily consider 3 components:
- Credit score of the investor
- Debt-to-Income ratio
- Down payment capacity of the Investor
- Seller Profile - Seller profile is another key consideration in the Multifamily Investing. The price of the Multifamily dwelling, or any property varies hugely as per the profile and credibility of the seller. Hence, the investor must do proper research into the profile of the seller before embarking upon the Multifamily Investing option. “Bank-owned” properties and “for-sale-by-owner” properties are differently dealt with.
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INVESTING STRATEGIES FOR MULTIFAMILY INVESTING
Investment is a big decision. Hence, it is important to choose the right kind of investment strategy. Investors should always practice due diligence and consider all aspects before embarking upon Multifamily Investment.
There are 3 primary investment strategies for Investing that are proven to give the best results. These are:
- BRRRR Value-Add Strategy
- Opportunistic Strategy
- Core Strategy
1. BRRRR Value-Add Strategy
BRRRR strategy involves-
- B - Buy - identifying and buying a value-add property
- R - Rehab- rehabilitating and renovating the property to make it ready.
- R- Rent - renting out the property.
- R - Refinance - refinancing the property to further grow the profits.
- R - Repeat - continuing the process.
This is the most popular strategy amongst investors because of its adaptability to all types of project requirements.
2. Opportunistic Strategy
Opportunistic real estate investing is cashing in on an opportunity. It involves high risk. Hence it also offers high returns potential, but only if it is done right.
Opportunistic investment strategy involves-
- Heavy Value Addition- This involving considerable renovations, because higher the investment in the property, greater the return prospects. Most of the properties in this segment are old, in need of significant make-over.
- Land Assemblage- Land assemblage is assembling or bringing together multiple plots of land into one for a big project. It requires a tedious task of dealing with multiple land and owner profiles.
- Land Banking – This is using land investment as a form of banking investment in which capital is secured by investing in land instead of securing it in a bank account. Hence, investors purchase tracts of land and secure the capital in it. This is called Land Banking. The capital appreciates with the value of the land. The Investor, or land banker sells the property at higher value.
- Land Development – This is developing a new property or re-building and redesigning an old property for investment purpose.
3. Core Investment Strategy
Core investing involves investing in stable, low-risk assets.
Core investments include property:
- Property in primary or major market areas.
- Property which is fully leased.
- Property with a good tenant base.
- Property which is upper-crust or class A or “trophy property”.
Core investment strategy is popular in hedge funds, life insurance companies, and other investment groups that rely on cash flow and cash reserve as opposed to risk on growth.
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Man is a social animal. Community living provides security and comfort and affordability to people. With a disintegration of joint family structure, and emergence of the micro family units, Multifamily Real Estate dwellings offer security and comfort of a cohesive society. Also, Multifamily property is affordable and offers a wide range of choices. And with migration of people across locations and cities, buying property is not always a profitable option for the millennials, who are the biggest buying force of today. Hence rentals are the best option for them. All this makes it one of the most lucrative investments.
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KEY FACTORS OF MULTIFAMILY INVESTING CHALLENGES OF MULTIFAMILY INVESTING INVESTMENT BENEFITS OF MULTIFAMILY INVESTING ADVANTAGES OF MULTIFAMILY INVESTMENT