Multifamily Real Estate Investing: The Pros and Cons
10 min read
Are you a brand new investor ready to start growing your real estate portfolio? Maybe you have a few investments and you’re eager to diversify and learn more about multifamily real estate investing.
No matter where you are in your investment journey, diversifying your real estate portfolio is a fantastic way to generate more cash, reduce risk, and grow your wealth.
If you’re in the market for a new investment, a multifamily property may be the perfect fit for you and your goals. Below, we’ll discuss the pros and cons of multifamily investing, along with our top tips for how you can find your first (or next) multifamily property deal.
What is multifamily real estate?
A multifamily home is essentially a single building that’s separated into units, or dwellings, to accommodate 2 to 4 families. This includes duplexes, triplexes, and quadruplexes.
Anything above 4-units is considered a “commercial” property. A house or apartment with only one dwelling is simply considered a single-family.
According to Statista, multifamily property investing shows no signs of slowing down! In 2023, there will be an expected 5.39 million multifamily properties in Canada, which is an increase from 4.96 million in 2018.
What are the pros of multifamily real estate investing?
Multifamily properties offer some incredible benefits to real estate investors. Here are some of the top reasons you should consider adding multifamilies to your real estate portfolio:
One of the biggest pros of multifamily family real estate investing is the ability to have an owner-occupied real estate investment. This means you can buy the property and live in one unit while renting out the others and collecting cash to pay down the mortgage!
This is a great opportunity to “house-hack” and start building equity in real estate quickly.
Another pro of multifamily investing is that your cash collected will accumulate faster. More units to be rented means more cash, which allows you to reinvest and continue building your real estate portfolio.
Multifamily properties generally reduce your risk of full vacancy. Unlike single-family homes (when losing a tenant means you’re at 100% vacancy) multifamily properties give you the opportunity to spread out cash flow between 2-4 dwellings.
This means a non-paying tenant or sudden vacancy won’t hit you (and your bank account) as hard.
Looking after several “doors” under one roof tends to be easier on managers. There are fewer independent buildings to keep track of and less travel required for inspections, emergencies, and general maintenance. This means you’ll save on property management fees, and you’ll have fewer headaches if you manage the property yourself.
Owning multifamily properties means you can take advantage of great tax benefits. You’re able to deduct maintenance fees and operating costs including utilities, management fees, insurance premiums, and marketing costs.
What are the cons of multi-family real estate investing?
Although there are some incredible benefits to owning multifamily properties, there are some drawbacks that come along with this type of investment.
Let’s go over them in detail.
High market entry costs
Generally, multifamily properties are significantly more expensive than single families which limits many people from being able to start with this type of investment. The price tag is often hundreds of thousands (or even millions) of dollars depending on your market.
Higher degree of management required
Many investors choose to manage single families and duplex properties on their own, but once you start investing in 3 and 4-unit buildings, property management becomes incredibly important.
Great property managers will help keep your units full of happy tenants by filling vacancies quickly, collecting monthly rents, performing routine maintenance, responding to requests for repairs, and conducting regular inspections of the building.
More units means more tenants which, inevitably, means a higher degree of management is needed to keep the property cash flowing.
Multifamilies tend to incur higher maintenance costs. Instead of maintenance and repair costs on one unit, multifamily investors need to worry about 2-4 units! This cost is easily offset by the increased cash flow, but new investors should be prepared for potentially higher maintenance and repair costs upfront.
The good news?
No matter which type of property you choose to invest in, you can do it even with limited cash on hand. Through fractional investing, BuyProperly allows people to invest in real estate for as little as $2500. This means your dreams of adding a rental unit to your portfolio are 100% achievable! Want to learn more? Visit www.buyproperly.ca to get started on your real estate investment journey.
What should you look for in multifamily real estate investing?
The property you purchase should 100% depend on your goals.
If this is your first real estate investment or if you’re hoping to “house-hack” and buy something smaller to offset your mortgage costs, a duplex is a great option. Similarly, if you want to manage the property yourself and keep your portfolio small, stick with a 2-unit.
If you’re working with investment partners, you want more cash flow, or you’re looking to grow your portfolio quickly, consider a 3 or even 4-unit property!
You should also consider how much time and money you’ll have to dedicate to your new investment.
If you’re a full-time investor ready to dive in and you’re not afraid of some hands-on management, a larger building may not seem so intimidating to you.
Many of the investors who purchase multifamilies through BuyProperly are looking for a more “passive income” project where they can grow wealth and see returns without having to be involved in the day-to-day management. If that sounds like you, sign up to view a list of their available properties.
We’ll talk more about how to evaluate multifamily properties in a moment.
How to find your first multifamily real estate deal
If you’ve weighed the pros and cons and decided multi-family real estate investing is the way to go, it’s time to find your first property deal!
The first thing to do when you’re looking for the right multifamily property is to contact a local realtor. They often have connections, opportunities, and deals that aren’t listed on public websites. They also tend to have great networks with other investors who may be interested in partnering with you.
Second, join all the local networking groups you can. Find Facebook groups, forums, and local meetups to connect with other investors to talk about real estate. Some of the best deals can be found through word-of-mouth and networking!
Third, consider investing out-of-town. If your local market doesn’t have a lot of availability or it’s too expensive, consider expanding your property search to neighbouring towns and cities. With the right management company, out-of-town multifamily investments can be incredibly lucrative!
Ready to invest in your next property deal?
BuyProperly offers people an opportunity to get into the real estate market using a fractional investing model. This means you can start with as little as $2500 and see projected annual returns of 10-40%. See a list of their available properties right here.
How to evaluate a multifamily property for sale
Unlike single-family properties, multifamily units tend to be more complex and there are several factors to consider when trying to figure out whether or not to make an offer on that listing!
Here are some important things to keep in mind:
Does the multifamily property you’re considering have 2, 3, or 4 units? How does this fit your goals? Keep in mind, larger properties may come with a larger price tag but they also yield higher returns.
It’s also important to know your local rules and requirements. In some areas, triplexes and quadruplexes must be registered with the city and cooperate with additional yearly inspections. Speak with your local realtor and city officials to learn more.
Cash flow is everything and all potential investors need to have a realistic picture of how much money they can collect every month.
How much rent are tenants currently paying each month? Also, how much rent could you potentially charge based on the condition and location of the property?
Cash flow is obviously incredibly important, but it doesn’t mean much if the operating expenses put you in the red each month!
Make sure to collect information about all the ongoing operating expenses for the property so you can properly calculate your net profit. This includes taxes, utilities, insurance, management, etc. Don’t forget to account for potential vacancies in your calculation (it’s a safe bet to assume a 10% vacancy).
When assessing whether or not to buy your next multifamily, it’s important to carefully consider all upcoming repair costs. Because multifamily buildings tend to be larger than single families and have more units to take care of us, those upfront costs are normally higher.
When purchasing, make sure you have enough money in the bank to make the necessary repairs to keep your new tenants!
Calculating Cap Rate is important because it tells you how quickly you’ll be able to pay off your investment. It’s a quick snapshot of your income and expenses as they relate to the price of your property.
Here’s how to calculate it:
First, find out your gross income (rent) each month and multiply it by 12 to get your number for the year.
Next, subtract all of your operating expenses for the year. This will give you your yearly net operating income.
Gross income – operating expenses = net operating income
Now, divide the net operating income by the total purchase price. Multiply this number by 100 and you’ll have your Cap Rate. The higher the Cap Rate, the higher the annual return on investment, and the quicker you’ll make your money back!
Generally, most investors like to stay above a 4% Cap rate. This varies from person to person and it’s important to consider your personal goals when using Cap Rate to assess a real estate deal.
Location and rental potential
The location of a building plays a crucial role in assessing its’ future cash flow potential. How desirable is the area? Is it near schools, shopping malls, and other city services? How is transportation to and from the location? Are there any plans to develop the surrounding area OR add neighbourhood features that would make the property even more attractive?
Location is everything and it’s an important consideration when buying your next multifamily property!
Conclusion: Should you invest in multifamily properties?
Multifamily real estate is an incredible opportunity for both new and seasoned investors.
These deals can help you grow your portfolio quickly, provide increased cash flow, and reduce your vacancy risk. You’ll also be able to take advantage of some great tax benefits.
But, multifamily isn’t right for everyone. If you’re prepared to handle multiple tenants (or pay a property manager who can) and you’re not scared away by higher operating costs and maintenance fees, you should strongly consider adding a duplex, triplex, or even quadruplex to your portfolio!
Want to learn more about how you can start investing in real estate for as little as $2500? Schedule a call with BuyProperly to learn more!