Single Family Or Multifamily Real Estate Investing: Whats Right For You
Owning multifamily real estate also comes with several substantial tax benefits. One of the most significant benefits come via depreciation. To encourage multifamily real estate owners to undertake capital spending, the government allows them to take a depreciation deduction against current income equal to 1/27.5 of the buildings value at the purchase each year. To simplify, if you purchase a property for $10MM and the land is deemed to be worth $400,000, each year a multifamily property owner is permitted to deduct 1/27.5th of $9,600,000 or $345,600, from current income.
In most cases, this deduction eliminates most or all of the current income. Its even possible the investor will put money in their pocket and show a loss on their tax return.
The useful life of a multifamily building, in the governments eyes, is 27.5 years, however, it considers the useful lives of certain items, including fixtures, appliances, and carpentry to be much shorter as little as 7 years. In the example above, if you were to conduct a cost-segregation study, you may find that $2MM of the value of your $9,600,0000 building comes from those particular items. If thats the case, your deduction would be even greater for the first 7 years in this scenario youd be able to deduct an additional $285,714.
Regulations Are Creating A Blue
Government regulation remains at the forefront of investors’ minds in terms of where to invest in multifamily real estate, Amir Kornblum said. Where there are more progressive policies when it comes to real estate investment, particularly in high-demand locations such as New York City, this is causing multifamily investors to look elsewhere.
In terms of investment dollars… If the State and Senate Assembly keep to the left and their wish list keeps getting bigger and bigger, the money is going to go towards the states where its free to practice capitalism, Kornblum said.
In the wake of policy changes at the state level, Kornblums multifamily clients who once shopped in New York are now looking to invest in some southern states like Georgia and Florida, where regulations are less restrictive.
Kornblum noted the restrictive element of state policy around real estate lies in the ability to raise rent. The ability in a rent-regulated building to raise rents is extremely constricted, he said. In addition, higher property taxes and utility costs on essentials like water are giving further reason for multifamily investors to look outside of blue states.
Unless theres a dramatic change in the policy strategy among some state governments in this respect, 2022 should see a further shift in multifamily investment patterns from left-leaning to right-leaning locations.
Consideration: Access To A Larger Investment Opportunity
Once you begin to invest your money into pooled investment models like syndications, you can possibly own property in shopping centers, mobile home parks, retail strips, self-storage deals, and many other amazing cash-flowing investment opportunities.
Sometimes syndications only require a minimum investment of $10,000, which obviously opens up the doors for investors who would otherwise be unable to invest in commercial real estate.
The majority of commercial real estate that you see today has been purchased using some form of a syndication structure.
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How To Analyze A Multi
Once youve worked out the value of the property, and what the return on investment would be using the calculations above, there are a few more factors to consider, to figure out whether the property is a worthwhile investment.
1. Do your due diligence
When youre serious about investing in a multi-family property, its vital to do your due diligence. Which involves getting banks statements, having unit inspections done, seeing the rent rolls, and so on. This will help you decide whether the value of the property makes it a worthwhile investment or not, by giving you the facts in black and white, and highlighting any issues that the property or management may have.
2. Calculate your cash flow
Your cash flow needs to be such that you wont be losing money every month, and that youll come out on top, even with a mortgage or loan. Your cash flow should take into account both the loan repayment and your capital expenditures in the future, and whats left will be your profit amount. A good rule of thumb, according to some investors, is to make sure that your cash flow results in double-digit returns.
3. Raise the NOI
Valuing The Property & Negotiating On Price
A property valuation is vital when buying a commercial real estate investment, whether single-family or multifamily properties.
The valuation is essential for several reasons, including investment analysis, taxation, financing, property insurance, and sales listing.
However, most people opt for a real estate valuation to determine the asking price when purchasing a multifamily property.
The following are some of the approaches to property evaluations you can use before making a multifamily real estate investment.
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New Development Vs Existing Product
Due to recent changes in use, the amount of new apartment construction nationwide and the current disparity between the cost to build vs. the cost to acquire, many investors are seeking out opportunities to invest in multifamily development rather than multifamily acquisitions. Some of the key points to consider when weighing development vs. acquisition investment opportunities include:
Development risk premium: Investors should be compensated for taking on greater risk associated with development. One rule of thumb is to receive a cap rate premium of 150 basis points or greater on development over acquiring an existing property in order to make it worthwhile for taking on the extra risk . As that spread narrows or increases, it creates less or greater incentive to invest in development.
Construction type: Multifamily development can take many forms with varying levels of cost. Construction type and finish levels are the key determinants of price per square foot building costs, which in turn influences the rents a property needs to achieve to hit its target returns. That list ranging from low to high building cost includes:
Stick built: The least expensive building style uses primarily wood beams and stud walls. It is more common to find lower to medium finish levels in stick built product.
Final Thoughts On Multi
Investing in multifamily properties is a good way to expand your real estate portfolio, earn additional income every month and gain experience in one of the most profitable industries on the planet. Successful real estate investing is about picking the right property, securing the best financing and interest rate, and maintaining a good cash flow. Now that you know how to pick a good multi-family property deal, you can go out and begin your search feeling empowered and informed.
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How To Reduce Risk When Investing In Multifamily Real Estate
Are you looking to invest in a multifamily property? Have you considered everything involved with owning a multifamily building or an apartment complex? Sure, you can get promising returns. Theres less chance of losing value in a down market than with a single-family property and financing might be easier. And you can quickly grow your rental property portfolio.
But there are a number of risks involved with investing in a multifamily property. Luckily, there are a few ways to reduce risk with solid, diligent planning.
Pros And Cons Of Investing In Multi
Many people decide they want to invest in rental property but arent sure where to begin. A logical first step, for many investors, is to buy multifamily property. Multifamily real estate investing is a popular form of real estate investing because its an asset class that most people can understand, having rented an apartment or owned a home previously.
People can understand the basics: each unit needs to have a functioning kitchen, bathroom, and some combination of bedrooms and living space. Rentals typically run on month-to-month or annual leases using simple, straightforward paperwork.
In short, for the masses, buying multifamily property is a lot less complicated than investing in office space, retail, hotels and other asset classes. Its a great way to get started with commercial real estate investing.
But to be sure, even multifamily property investing is not for the faint of heart. There will certainly be challenges investors face. Here is Trion Properties guide to the pros and cons of multi-family property investment.
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Austin Is Manuka Honey For Investors With The Metro’s Multifamily Market So Strong That It Inspires Long
- Ascent at North Burnet Apartments. All images courtesy of Hertz Investment Group
- Ascent at North Burnet Apartments
- Ascent at North Burnet Apartments
- Ascent at North Burnet Apartments
- Ascent at Quail Creek Apartments
- Ascent at Quail Creek Apartments
- Ascent at Quail Creek Apartments
- Ascent at Walnut Creek Apartments
- Ascent at Walnut Creek Apartments
While hospitality and retail are bearing the brunt of the health crisis, the office sector is also struggling as its return to normal has been repeatedly postponed. What seemed like a safe path, thanks to vaccines, is being pushed further into the future by the omicron variant. Not to mention the fact that after 18 months of pandemic reality, employers and employees alike have largely adapted to a new way of working and, in many cases, that means permanent remote or hybrid work. The safest move for commercial investors is the diversification of their specialized portfolios.
This is the strategy adopted by Hertz Investment Group, a real estate investment firm that acquires, markets and manages high-rise office properties throughout the U.S. Its portfolio of investment properties comprises more than 21 million square feet and spans 25 cities. But last year marked a double debut for Hertzone on Austins scene and another one in the multifamily investment industrywith the acquisition of three value-add opportunities in Texas capital, from DB Capital Management.
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Make Money From Faster Investment
Multifamily homes can help you build a substantial portfolio in a short period. This benefit is achievable if youre a dedicated real estate investor.
If youre looking to invest in many rental properties, multifamily properties are a decent alternative. However, its easier to acquire a single property with several units than to purchase numerous single-family rental apartments.
Again, the inspection and closing of a single apartment complex are considerably faster and easier than that of five or more single-family residences.
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Renovate And Make Repairs
Before you open your doors to the public, youll need to make any repairs detailed in your inspection report and ensure that your multifamily home follows local codes.
You may also want to invest in some cosmetic upgrades, like new doorknobs, light fixtures, cabinet pulls, and a fresh coat of paint. Bear in mind that you might find youre able to attract more tenants or even increase your rent not to mention overall net operating income with the help of these upgrades.
Be sure you have a maintenance plan in place as well. This plan should handle any tenant repair requests and regular upkeep of the building as well as lawn care and snow removal.
Work With An Experienced Multifamily Realtor
As you read here, its not easy becoming a multifamily investor.
But, working with an experienced multifamily Realtor saves you time and money. Thats because your Realtor knows the location and uses MLS and other data to find the best multifamily properties for you to purchase.
Contact Us to hook up with one of our experienced multifamily Realtors.
Steven Rich, MBA Guest Blogger
We hope you enjoyed how to invest in multi-family real estate. Check out more of our blog pages here.
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Introducing Mogulreit Ii The Multifamily
MogulREIT II is a public, non-traded REIT that invests only in multifamily properties spread across the U.S. The REIT intends to invest in established, well-positioned apartment communities that offer value-added opportunities, and which have demonstrated consistently high occupancy and income levels across market cycles. The goal is to realize capital appreciation in the value of its investments over the long-term, and to pay stable cash distributions to stockholders.
Additionally, the underwriting team for the REIT seeks under-managed assets in high-demand neighborhoods to invest additional capital in cosmetic improvements, as part of the offerings value-enhancement strategy to reposition the properties to increase both average rental rates and resale value. Investors can potentially gain exposure to multifamily properties without the hassle and upkeep of purchasing real estate directly.
For more information, please review the Offering Circular prior to investing.
Single Family Vs Multifamily Investing
Investing in single-family vs. multifamily properties is a great debate in the world of real estate investing. While each offers several compelling advantages, each side represents a very different exit strategy for investors, including management style and income earned. Investors, insurers, and lenders view these properties differently. Comprehending the ins and outs of multifamily and single-family properties is critical for your success.
For those considering taking the plunge and investing in multifamily properties or single-family properties, its important to understand which investment vehicles do what. Deciding among single-family or multifamily properties is largely about personal preference and goals. The following will explain the major differences between the two investments, including each strategys various advantages and disadvantages. If you are looking for an answer for the single-family vs multifamily debate, I encourage you to keep reading.
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Tips For Investing In Multifamily Properties
The only way to get started with investing in multi-family properties is by:
Search out listings and explore available property
The internet has put a lot of resources within the reach of everyone. You can start running searches with variable search strings to come up with property available in various locations. Research as many as you can. It would help if you could access ones with images.
Build and Leverage a Network of your own
Leverage networks such as Linkedin and Buildium in order to contact a range of people tied to the real estate industry including investors, property owners, etc.
Meet with other investors line up funds
Hooking up with investors can help you get some handy insights. They may be interested in working with you because they are normally on the lookout for a good deal to invest in.
Survey localities by driving through neighborhoods
It is always a great idea to familiarise yourself with the localities you want to make a property investment. It can help you assess a lot of things about the property and the people already living in those facilities. This can help at the time of inspection and analysis.
Conduct few interviews with commercial brokers
Look up and contact brokers. They will also have some handy insight for you.
Which Is Best For You
There’s no one-size-fits-all answer here. The best multifamily real estate investment for you depends on a few factors, so here are some of the things you might want to consider:
In a nutshell, the best course of action is to decide where you stand on these things and choose the multifamily real estate investment that makes the most sense for you.
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What To Look For When Investing In Multifamily Properties
Casual window shopping for real estate is nice to do on a Sunday afternoon, but multifamily investing requires much more than browsing your local open house. Investors should conduct their due diligence. This will include locating a property below market value and commencing efforts to analyze and assess its financial sensibility.
Along with the actual hustle of finding so-called property, it takes a combination of things to ensure a quality real estate deal. In most cases, the search will begin by locating a potential property. Then, compare purchase prices, short-and-long-term costs, and rental estimates. While this will generally forecast a ballpark figure of what investors can expect, its up to them to continue their due diligence and refine those numbers to ensure success. Because investing in multifamily properties requires a little more attention than other real estate deals, an investors first concern should always be on the numbers. These financial figures will not only expose the true value of an investment property but reveal its bottom line. In addition to the numbers, there is a selection of underlying factors that can influence multifamily investing.
For those looking to invest in a multifamily investment deal, the search begins with the following checklist:
Gross Rent Multiplier Approach
Another common real estate investment valuation method individual investors use is the gross rent multiplier. This method isnt the best for commercial valuations. It works by looking at comparables to enable the investor to find the property locations average gross rent multiplier.
However, make sure you ensure the values are accurate to get the correct property valuation. You also need to check the buildings pro forma to determine the propertys average gross rental income. Then use this formula to evaluate the property:
Annual income x gross rent multiplier = property valuation
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Look For The Best Locations For Your Rental Strategy
After deciding what rental strategy works best for you, it is time to decide where to invest in real estate. Succeeding in multi family real estate investing is highly dependent on location. Therefore, real estate market analysis is needed at this point.
The real estate market analysis is a process that an investor goes through in order to analyze a certain location for profitability. It examines the market in terms of rental demand, optimal rental strategy, appreciation rates, future market trends through predictive analytics, as well as other variables that are unique to each real estate market you look into.
As a beginner real estate investor, you will need proper real estate investment tools to help you with the process. And there is no better tool for multi family real estate investors than a heatmap analysis tool!
This advanced tool is one that every real estate investor must use in order to decide on the best rental strategy and the best location at the same time. The heatmap tool will basically display all the neighborhoods which have properties for sale. Once you choose a certain neighborhood, you get a brief neighborhood analysis in addition to some profitability measures for both traditional and Airbnb rental strategies. In this way, it will be much easier for you to determine whether the location is fit for your rental strategy of preference.
Mashvisors Heatmap Tool