A multifamily property, also known as a multifamily dwelling unit, is a residential building with several separate housing units. It can accommodate numerous tenants but with each of them having a separate house unit. The smallest scale of multifamily properties is a duplex with two housing units, followed by triplexes and four-plex with three and four housing units, respectively.
Multifamily investing is a great way to venture into the residential real estate market, especially since banks finance them similarly to single-family homes. You can run the rental leases monthly or annually, and you can even live in one of the units to make management more effortless.
Here are some of the reasons to venture into multifamily real estate investment.
Strong rental demand
Since the financial crisis of 2008, the prices of median homes have been gradually increasing, making homeownership challenging for many young people. According to research, less than 20% of younger Millenials own homes, while 29% prefer to live with their family at home or friends.
Today there is a strong rental demand from Millenials due to the unaffordable rates of homes. Many of them also prefer the flexibility of changing residences and the geographical location making multifamily property investment a prospective venture.
Buying multifamily properties is a great way to earn passive income without too much of a hassle. You can engage a property management company to oversee your day-to-day responsibilities, which is beneficial, especially if you have no experience managing rental properties.
Some owners prefer to self-manage, saving hundreds of dollars on property management fees. Sometimes an investor will live in one of the units and rent the others, making management easier.
Many people consider multifamily real estate a low-risk and a defensive investment. According to experts at MarketSpace Capital, multifamily homes address a relatively inelastic housing demand. The reason is that many people suffer job losses, economic duress, and strain during economic recessions and are forced to sell their homes and move to rental housing, which creates a demand for multifamily rental properties.
You only need one loan when buying a multifamily property, unlike buying several single-family rental homes. The latter will require several individual loans, which can be challenging to get, track and manage over time. Furthermore, you may need to apply for different types of loans that require different maturation time zones, a more confusing venture if you are a first-time real estate investor.
Investing in multifamily properties offers a higher tax advantage. After buying a multifamily house, you can depreciate your capital expenses to offset your tax obligation. The best part is that a multifamily property can be depreciated over 27 and a half years, unlike the 39years for commercial properties. Furthermore, the interest rates for commercial mortgage loans are tax-deductible, and you can receive beneficial tax treatment directly from multifamily projects.
The bottom line
Multifamily real estate investments are great and can offer you a consistent passive income stream plus tax incentives. However, they come with drawbacks like a higher initial capital and can be challenging to manage.