Has the Opportunity for Investing in Multi-Family Real Estate Run Its Course?
Real estate has always been a desired investment. In particular, multi-family properties can yield attractive returns. Whether it’s apartment buildings, condos, or duplexes, renting living space can be a reliable source of income, as long as you know what you’re doing.
In recent years, though, things have shifted. The U.S. is in the midst of a housing crisis, and a number of individual states are experiencing it even more severely—especially in the western half of the United States. In the current climate, is it still profitable to invest in multi-family real estate, or has the opportunity run its course? Like any investment, there are pros and cons. Let’s explore the situation.
Advantages of Multi-Family Real Estate Investment
First, let’s look at the basics. What’s the appeal of multi-family real estate versus other types of investments? For one thing, it’s been considered to be relatively stable. People will always need housing, and if you can provide it, you should be able to generate a regular income. This can make it a lower-risk investment than most other types of properties.
It also has the potential to be as hands-on or hands-off as you want. If you want to get involved in managing the property and making sure everything runs smoothly, units are filled, tenants are happy, etc., you can do that. But if you’d rather just generate a passive income, you can hire a property manager to handle the day-to-day business and simply collect the money generated by rents. Or you can contribute your money to a fund as a passive investor.
It's a simpler way to generate more income as well. Say you have a 5-unit apartment complex. That’s the potential for five rents from a single building. If you invest in single-family homes, you’d need five different loans and five different insurance policies to generate the same amount of money. The costs would be higher, the paperwork would be greater, and it would be a much more complicated investment overall. However, despite the increased complexity of owning multiple buildings, you’d have better diversification.
There are significant tax advantages that come with investment properties as well. You can deduct the interest you pay on your mortgage each year, alleviating the cost of investment. You can also deduct other expenses tied to the property, such as maintenance, insurance fees, advertisements, etc. You can also depreciate the property and thereby further reduce your taxes.
Finally, the property itself will typically appreciate in value over time. Even if rentals turn out not to be profitable for you, if you hold on to the property long enough, you can sell it for significantly more than what you paid and potentially still get a good return on your investment.
What’s Causing the Housing Crisis?
So it’s clear why multi-family real estate can be an attractive investment in general, but does this still hold true during a housing crisis? What’s causing the shortage and what does it mean for you as a real estate investor?
A variety of factors have come together to cause the current housing shortage. First, as the price of land goes up, fewer people can afford it. There’s also an overall increase in low-density housing developments, which means fewer people living on more land—i.e. fewer available houses.
However, those factors are all preventing people from owning their own homes, thus forcing more people to have to rent longer. That should make multi-family real estate investment even more profitable, right? Not necessarily, as there are other factors in play.
For one thing, Airbnb is making things more difficult for both renters and landlords. More and more property owners are turning their units into short-term rentals for vacationers, rather than long-term rentals for actual residents, as it can make a lot more money in a shorter amount of time. Not only is this contributing to the housing shortage, it’s also driving rents up.
Another thing that’s making multi-family real estate investment more difficult is rising costs of pretty much everything. Insurance premiums and property taxes are both necessary expenses for any property owner, and they’ve both gone up. As a landlord, you’re expected to provide basic maintenance for your properties as well, including repairs of things like plumbing and electricity in the individual units. And the cost of maintenance has gone up as well.
Additionally, interest rates are going up, so the mortgage payments on your property will be higher and often leave you in debt longer. In order to cover all of these costs, rents need to increase as well. But if your rents get too high, no one can afford to pay them, and your units remain empty.
As a property owner, lawsuits from tenants or visitors can be a constant concern. Do you have enough liability protection? Not having enough insurance to cover damages from natural disasters or manmade calamities like fires can be another worry.
The Pros of Multi-Family Property Investment
Despite all of this, investing in multi-family homes can still be a profitable endeavor—as long as you do it right. First of all, diversify! The more units you have, the greater chance you have of generating income. If you rent out a single family home and the tenants move out, you have nothing coming in until you can find someone new to replace them.
In a multi-family property, you may have a few empty units, but there’s also a greater chance of at least a few paying tenants at any given time. So even when you’re not getting great returns, you at least have some degree of stability, thanks to those remaining renters.
What about the rising costs? Well, you don’t have to shoulder them all yourself. One of the best ways to invest in multi-family real estate is via a group fund. Rather than buying and maintaining the property yourself, you and a group of other investors pool your money into a real estate fund.
Like a hedge fund, venture capital fund, or any other group investment, you have someone to manage it who knows what they’re doing. They find the property to purchase and handle maintaining it, keeping it occupied, and all the other ins and outs of property management. You can then reap the benefits, without the hassle and with much less risk. It also becomes easier to diversify geographically. In addition, personal liability concerns are alleviated as your capital at risk is limited to the money you invested.
Moreover, with a group real estate fund, you don’t need to invest as much. You can put in a lot less than the several million that an apartment building typically costs.
One of the benefits of real estate investing is that you can still find opportunities even if prices are high because the industry is not as efficient as the stock market. You may still be able to find a distressed seller and get a good price. On the other hand, you may pay way too much if you don't understand the dynamics of real estate investing.
In today’s market, multi-family real estate isn’t always an easy investment, but it can still be profitable under the right circumstances. If you’re interested in understanding more about the best ways to generate wealth from investing in real estate, we can help you.
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