5 Reasons Why Multifamily Real Estate Investments Can Give You a Better Return
It shouldn’t need to be explained why multifamily real estate is more profitable, but there are a lot of investors out there with a portfolio full of houses that are each only returning a couple percentage points above expenses who could afford larger buildings if they took a chance. It can seem daunting, buying a property that is two or three times more expensive than the next most expensive one in your portfolio, but it’s also the key to moving your investment strategy into the territory where you can really reach rapid growth. Here are five reasons why you need to do it.
First, multifamily properties are proportionally less expensive per rental unit, and the units rent for more per square foot than houses typically do. Your investment strategy might have to involve offering some utilities with the rent, especially if there’s only one main source of metered service to a whole building, but that’s an organizational issue and not a real problem. So, the result is you get 5 or 6 rental units for the same cost that you would put into 2 or 3 freestanding homes that are each a single unit. The bigger the building, generally, the less you spend per tenant to invest.
Multifamily real estate also qualifies for more useful loan support than single-family dwellings. Buying houses as an investment means taking out a commercial loan for a residential property, so you’re already paying more than a homeowner looking to purchase for themselves. Buying apartments, on the other hand, means accessing the kind of LTV reserved for other commercial investments like storefronts and industrial property instead of the lower LTV offered to those buying single unit income properties.
Your third reason? You can afford to be below capacity. The more units you have and the less it costs to keep them on a per-unit basis, the more you can afford the turnover time between tenants. If you’re looking to avoid downturns that put you into the red some quarters, you need to have a volume of properties that can absorb those expenses without drawing on your reserves, just because your income and your margins are good enough.
The fourth and fifth reasons are simpler than the rest. Number four? Multifamily real estate purchases can use the like-kind exchange to defer capital gains taxes when you sell them. Number five? All these advantages work as a hedge against risks taken in other areas of your investment portfolio. That’s the biggest advantage of all.