If you’re looking to expand both your rental and investment portfolio, buying multifamily properties could be your best option. If you already own some single-family rentals (SFRs), you’ll enjoy the increased security of having multiple streams of income within one building. Property management is also easier with all your tenants under one roof.
It’s easy to scale your investment portfolio with multifamily properties and generate steady recurring revenue with only incremental cost increases. However, if your prior experience in real estate investing has been with SFRs — or you’re new to real estate investing as a whole — you’ll want to be aware of a few things to watch out for when you become a multifamily investor and property manager.
Great Reasons For Buying Multifamily Properties
You may be surprised to learn that, although the initial investment may be greater, buying multifamily properties offers several advantages over single-family rentals. If you’re in a position to hire a property manager, you’ll see a gain in passive income that requires even less of your time than you’d expect. And if you can automate systems in your buildings, including theft and burglary monitoring, temperature controls and flood detection, you can increase your operating income even further.
Let’s explore three of the greatest benefits to buying multifamily properties.
Generate Consistent Cash Flow
If you’re an investor with just a few single-family rentals, you know what a squeeze it can put on your cash flow when one of your tenants leaves. Plus, finding a new resident for the apartment also costs time and money.
SmartMove determined that the total average cost of a vacant property can be as high as $1,750 per month. That’s a high number, but it won’t vary much based on the number of units you own. You are still losing money from that rental being empty, and you’re still paying your mortgage and other operating costs. Plus, you have to invest in marketing to fill the unit.
If you own two single-family homes and rent them out and one goes vacant, you’ve just cut your income in half. On the other hand, if you own four townhouses with four units each and one family moves out, you’ve only reduced your income by 1/16. In short, buying multifamily properties can help deliver more consistent cash flow over time, with less risk than renting a single unit.
Find Funding More Easily Compared to Buying SFRs
You may be surprised to learn that it’s easier to find funding for a multifamily property than for a single-family home. That’s because of the scenario described above. Greater diversity equals less risk — for the investor and for their lender. Even if a few tenants are late with their rent every month, income from other tenants is likely to cover the mortgage costs, reducing the risk of a foreclosure.
If you need to borrow money for a real estate investment, you may find it easier to get a loan for a multifamily property, especially if you can show a track record in managing investment properties or have excellent credit.
“House Hack” Your Way to Success
Many people who get their start in buying multifamily properties do so only with the intention of covering all or part of their own housing costs. They buy a two- or three-family unit and live in one unit while renting out the others. Depending on how large of a unit you buy, your rental income could cover your whole mortgage — plus utilities and other living expenses — or just help make those monthly payments more manageable.
What To Look For When Buying Multifamily Properties
When you’re choosing a multifamily property, you’ll want to be sure to run “comps,” or see that the price is comparable to similar properties in the area. As with any real estate purchase, making wise choices in multifamily properties comes down to location and value. Consider the property’s vacancy rate, as well as overall vacancies in the area. You’ll also want to verify the property’s cash flow, or operating income, and compare against the monthly costs.
It’s also important to consider the safety and security of the property. Look for buildings with property-wide alarms to help prevent theft and also warn of emergencies like fire and floods. Centralized security and monitoring technology may reduce your insurance costs and also give you greater peace of mind.
Today’s Tenants Want Smart Homes
One study found that more than 3 in 4 tenants would pay more for an apartment with security cameras, keyless entry, smart thermostats and other smart home features. Plus, 57% of those polled said they would be willing to pay $20 per month more for these amenities.
If your tenants pay their own electric and heating bills, smart thermostats will save them money that could more than make up for the rent increase. And if you’re offering “utilities included” options for tenants, you can reduce your operating costs while providing convenience to your tenants.
Buying Multifamily Properties: Drawbacks To Consider
Buying a multifamily property is a considerable undertaking. You’ll want to invest in property management software to make showing units, collecting rent and tracking income and expenses easy. If you’ve been a casual, or hobbyist, investor with one single-family rental, you’ll need to consider the increased maintenance, repairs and even marketing and people skills that go into managing a multifamily property. However, the benefits of increased cash flow, more income security and scalable growth can make buying multifamily properties worthwhile.
Hiring a property manager and investing in smart building technology that includes keyless entry can make managing and renting properties easier. PointCentral’s keyless smart home solutions can help you gain business insights, seamlessly show properties and keep your investment secure.
Is Buying Multifamily Properties Your Next Step As An Investor?
If buying a multifamily property is your next step as an investor — or your first foray into real estate investing — you’ll want the proper team and technology by your side to do so. The realtor, property manager and contractors you choose for building repairs and maintenance can play a big role in your success.