Real Estate, The Pros and Cons of Multifamily Investment Property
There are five categories for real estate investment property. We continue our discussion on the advantage and disadvantage each category presents hoping that the information will help those who are real estate investing as well as others who simply seek to learn more about real estate investment property.
Drawing from the list of real estate investment categories illustrated below, this time we will discuss number three on the list, multifamily properties.
- Land speculation
- Single-family homes
- Multifamily properties
- Commercial and industrial properties
- Retail shops and shopping centers
Multifamily Properties
Any property that has more than one family unit is a multifamily property. The smallest would be a duplex (two units, often side by side or one on top of the other), and the largest, well, large rental complexes that consist of hundreds of apartments.
Advantages of Multifamily Property Investments
The most obvious is the investor will grow wealthy in the long run simply by holding onto the property and letting the renters pay off the mortgage. Even if there is no immediate cash flow, each time an owner collects a rent check it is virtually using other people’s money to pay the owner’s debt.
Moreover, multifamily properties serve a basic need, which limits the downside risk.
Regardless where you point to on a map, chances are good that there will be people, for any number of reasons, ready to rent. People have to live somewhere, and are prepared to pay for it.
Disadvantages of Multifamily Property Investments
The disadvantages mostly surround the management problems that come in dealing with tenants; apartments can be very management intensive.
Moreover, all rental apartments thrive or die because of the “other people’s money” scenario. When a rental market shifts to the point where there is a shortage of tenants, then owners can no longer be as selective about tenants, might experience higher vacancy, and might have to reduce rents. When there is a shortage of apartments, property owners can be more selective about the type of tenant they rent to, vacancy factors approach zero, and rents generally increase.
In other words, because multifamily property investors depend on renters to meet their debt service and other obligations to keep the property, they must prepare to flex with the market conditions regularly.
How to Buy Multifamily Properties
All income-producing properties have the advantage of being able to support debt from the income they produce, and therefore gives the investor an edge in the ultimate financing of the investment.
Unlike the situation with vacant property and single-family home financing in which the investor’s financial strength is the most important element lenders consider, all income properties are viewed from the point of view of the property first, the investor second. The lender will evaluate the property based on the income stream.
It is crucial, therefore, that the real estate investor represents the property to the lender with accurate income and expense data, and fair projections that might reveal a better end-result.
To achieve this, the prudent investor would be wise to invest in good real estate investment software; quality presentations made to lenders is simply smart business.
