Even though multifamily properties, up to four units, tend to be very logical and straight forward investments, there are still challenges associated with financing and maintaining them.
Here are some advantages and disadvantages to adding multifamily homes to your investment portfolio.
Great Cash Flow. Rent is predictable and it’s pretty much guaranteed. Tenants are locked into termed contracts for a fixed amount and you’re able to hire a property manager to handle the day-to-day tasks for you.
Low Risk & Scalability. Multifamily properties are easy to scale due to the fact that they have the same level of risk in ownership as do single family homes. Because they are easy to maintain and relatively easy to finance, they’re considered low risk.
Valuation Potential. They will appreciate over time and are more resilient to economic downtown. During hard times, many people find themselves looking for a home to work in an effort to decrease living expenses.
Tax Benefits. You’re able to receive a tax deduction on the mortgage during the first fiscal year. These homes can also be depreciated over a 27.5 year period even if the property technically appreciates and that depreciation can be used to offset a portion of the rental income.
Management Intensity. You still have to deal with individual leases, tenants and repairs even if you have a property manager.
Cost. Most lending/financial companies want 20% down payment and renovations can be costly.
Competition. Multifamily homes are a great investment for beginning investors and there are a lot of people interested in purchasing multifamily homes. This can lead to bidding wars as well as low inventory and competition in rental prices if several people are renting out multifamily homes in your area.
Although a “safe” risk, real estate of any kind is still a risk. To further minimize your risk, manage one project at a time when first starting out. Keep your eye on the goal (i.e. passive income, valuable assets, wealth building, etc) and staying focused is the best way to grow your real estate portfolio and plan for any potential mistakes.