You must have heard of buying a single house, apartment, or condominium and putting it out to rent. It has various advantages, including portfolio diversification, tax breaks, building equity, and balancing market uncertainty.
This is called multifamily investing. It involves buying a residential complex with several housing units. Some examples are apartment complexes, townhomes, and duplexes wherein several families can stay in one area.
As a result, investing in a multifamily property comes with plenty of benefits. The most obvious is higher cash flow every month because you will have several renting spaces. Studies predict a 7% growth of effective net rents for such properties in 2022, besides a 95% occupancy level.
What are the different forms of multifamily properties?
You may come across properties of all shapes and sizes in this category. These include dense, high-rise, urban apartment buildings to resort-style complexes with fitness centers, swimming pools, and outdoor patios. In construction terms, you could classify them as:
- low-rise or garden-style (two to four stories high)
- mid-rise (between five to nine stories)
- high-rise (10 or more stories)
What does data say about this real-estate investment?
Here’s data that will convince you of the benefits of investing in these properties. Between 1992 to 2017, investment in multifamily properties provided the highest average annual total returns at 9.75%. It also offered the second-lowest level of volatility at 7.75%, according to a research conducted by Coldwell Banker Richard Ellis (CBRE) in 2018.
Another report by the National Apartment Association said that people above 55 years preferred rental households sharing space with other housing units. However, the elderly prefer rentals because of the security and support.
Data also reveals that investment in these housing units comes with a preferential mortgage market, thereby making it easier for borrowers to get a loan from a lender. Therefore, investors of these real estate properties enjoy more funding opportunities than in the commercial property market. They receive higher loan-to-value ratios, lower mortgage rates, and lower debt-service-coverage ratios.
What are the benefits of investing in shared properties?
If you’ve never invested in shared properties, you could consider doing so in the future. It has several advantages like higher risk-adjusted returns and cash stability.
Here are some more benefits.
- The considerable growth in this sector
One can expect investment in this category to grow tremendously. Despite the pandemic causing a setback, occupancy in shared homes is reaching pre-pandemic levels. According to CBRE, urban vacancy rates (number of unoccupied houses in the city) will fall below 4% by 2022. Further, the total investment volume for this investment type will reach around $234 billion in 2022.
- It provides greater stability
Firstly, even if some tenant is late on the monthly payment, it has a negligible impact.
Secondly, you may be constantly worried about a tenant leaving after serving you notice in single-family rental housing. It can impact your cash flow, which is interrupted under such circumstances. However, shared houses have no such worries since they usually have a monthly rental system, thus providing maximum stability. Even if someone vacates the property under a multi-family system, it will be a minor change in occupancy, and your cash flow will remain largely unaffected.
- Incredible tax benefits
With investments in shared apartment rentals, you will enjoy plenty of tax benefits, creating tax-advantaged income (any investment exempt from taxation or provides several tax-related benefits).
You receive the most favored income tax treatment of any asset class by the use of depreciation, 1031 exchanges, self-directed IRAs, and cost segregation to accelerate depreciation capture.
- Appreciation is considerably higher
The appreciation of multi-family homes is higher compared to single-family houses. Even minor changes lead to substantial increases in value through leverage and multiples. For example, increasing the rent price across several tenants enhances its significance. However, it’s good to increase your property’s value with new updates, installations, and fixtures before increasing the rent.
Why should you hire an investment firm?
An investment firm has experience in dealing with these kinds of investments. They will help you consider several factors before making a decision.
Professionals would be updated with the market developments and help you plan an investment accordingly. You can depend on their expertise to enjoy an optimized economic performance and ensure balanced returns and strong asset depreciation.
These are some advantages of multifamily investing that you will find interesting, especially if you’re looking to invest in it. From a stable cash flow to tax benefits, it is a wise investment from every perspective.