Many first-time real estate investors buy multifamily property when they start real estate investing. Perhaps it’s because most have at one time or another rented an apartment, or knows someone who has, and therefore feel they comfortable with it. Regardless, apartment ownership is a stalwart of real estate investing.
Multifamily property is any rental property that has more than one family unit. The smallest would be a duplex (two units), while larger rental complexes could easily consist of hundreds of apartments. In other words, there’s no upper limit to the amount of units.
Not unlike any real estate investment, however, multifamily housing offers real estate investors both, advantages and disadvantages of ownership. Pros and cons. Things that would make a real estate investor shout for joy about apartment ownership, and other things that at the same time perhaps would make real estate investors bemoan the day they became a landlord.
We’ll consider a few of those advantages and disadvantages in this article, plus we’ll discuss the best way to obtain a good financing package on rental income property.
Advantages of Ownership
Foremost, with multifamily property ownership, 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.
Secondly, multifamily properties serve a basic need, which limits the downside risk. People have to live somewhere, and in any community there are always people ready to rent for any number of reasons. Moreover, when there’s an apartment shortage in the area, property owners can be more selective about the type of tenant they rent to, vacancy factors are likely to approach zero, and rents will generally increase.
Disadvantages of Ownership
Unfortunately, apartments can be very management intensive because they surround tenant issues. It’s never fun having to resolve tenant conflicts, or having to evict a deadbeat tenant.
Also, because all rental apartments thrive or die due to other people’s money, 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. For this reason, because they depend on renters to meet their debt service and other obligations to keep the property, real estate investors must prepare to flex with the market conditions regularly.
How to Finance
Since income-producing properties have the advantage of being able to support debt from the income they produce, rental property gives the investor an edge in the ultimate financing of the investment.
However, real estate investors should understand how lenders view rental income property in order to get the best financing possible. That unlike the situation with vacant land 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 and the investor second. That is, the lender doesn’t simply consider the borrower’s financial strength, but will heavily evaluate the property based on the property’s income stream as well.
Therefore, it’s crucial that you present accurate income and expense data and fair projections to the lenders that might reveal a better end-result of owning the multifamily property. The good news is that there is real estate investment software available that can create these cash flow presentations for you.
Yes, multifamily property ownership can be profitable, and at the same time, a migraine head ache. But as a friend of mine once said, “Life is a series of trade offs.” So the question really is, how much are you willing to endure to make money? Your answer will shape your real estate investing strategy, and ultimately determine whether apartments are a good investment for you. Here’s to your success.