4 Reasons Why Investing In Multifamily Investment Properties Is a Smart Idea

Financial and economic experts agree that we are becoming a “nation of renters”.

This includes millions of empty nest Baby Boomers looking to downsize and get out of maintaining a large house they no longer need.

Add to that the vast numbers of Millennials facing huge student loan debts coupled with shrinking wages and it’s no surprise why the market for quality apartment rentals is red hot.

The demand for multifamily investment properties is rising on a daily basis, but that doesn’t mean investors should just jump into any deal involving multiple housing units in a single structure.

When evaluating a potential multifamily real estate investment property, many smart investors with a proven track record for making sound, profitable real estate decisions evaluate a property based on the likelihood of satisfying four specific criteria, which can also be thought of as the expected beneficial outcomes of owning a multifamily investment property.

These four criteria for evaluating the likelihood of a multifamily investment property to be a smart choice are: leverage, liquidity, control, and scalability.

In this article, I’ll summarize what these four characteristics are and how they can be applied to the analysis of your next multifamily investment property to purchase.

1. Leverage

Leverage in a real estate investment is the secret sauce for fueling exponential growth.

Can you name another investment type where you can invest a relatively small amount of capital, for example $75,000; in exchange for the acquisition and control of a $500K income-producing asset?

You won’t see this in stocks, bonds, or any financial instrument that a wealth advisor might recommend.

Plus, there are numerous additional financial and tax benefits, such as cash flow, appreciation, and tax writeoffs (more on this later).

In addition, banks and private lenders love the protection and security that real estate offers because buyers can cover expenses on a cash flowing property (such as a multifamily apartment building), making it an ideal win-win scenario.

And let’s not forget the benefit to communities for having additional housing options on the market to provide more options for more people.

When it comes down to it, investors in multifamily apartments and other cash flowing assets are able to acquire and control more assets without using all of their own capital.

This trend will only continue to grow, especially in the Internet era where virtually any type of investment real estate opportunity can be found online and investors worldwide can purchase it even if they are not physically located near it.

2. Liquidity

How fast a real estate investment can be converted into cash can also be considered how “liquid” the investment is.

One popular way of tapping into a real estate investment property’s inherent equity is through refinancing, or getting a lower interest financing rate from the lender, who charges a premium on the purchase loan.

The lower the rate, the less the cost to own/operate the property.

Additionally, the Net Operating Income (NOI), which is the gross income of the property minus the property’s operating expenses (i.e. costs to own/operate the property) is increased when a favorable refinance is implemented.

In the case of owning a multifamily investment property, the goal is to increase NOI though growing the gross income (e.g. rents collected) and decreasing operating costs, which includes financing charges on the purchase loan.

Savvy real estate investors know that refinancing is the perfect strategy to access equity that has accumulated in a property, allowing for withdrawals of 6 figures or more.

Remember, when it comes to real estate investing or any type of business, the lesson here is: “It’s not what how much you make, it’s how much you keep.”

3. Control

In the case of multifamily real estate investing, when done right, you get a monthly paycheck from rents collected from tenants. This cash flow is what makes multifamily investing so attractive.

In addition, the aforementioned tax benefits cannot be emphasized enough.

That’s because the way our government works, there are major incentives for real estate investors to provide and develop affordable housing solutions.

One of these tax benefits is depreciation, which can be thought of as a non-cash expense allowing investors to make deductions on income collected, which lowers tax burdens.

In other words: while the asset appreciates, the depreciation further enhances the overall investment value of the property. That’s a nice perk, would you agree?

Another tax benefit strategy is implementing a cost segregation study.

In this study, the investor designates their personal property assets alongside real estate property holdings, while segregating any personal assets for tax reporting purposes.

So what does this translate to for the investor?

Depreciation can be accelerated from 27.5 or 39 years to a shorter time periods of 5 to 15 years.

This means huge portions of depreciation expenses can be written off at tax time so that any losses can be mitigated quicker, helping investors free up more funds for more investments and growth.

This cost segregation combined with depreciation can be a real game changer for many investors looking to truly expand their real estate investing business and take things to a new level.

4. Scalability

Multifamily real estate investing in multifamily properties that produce monthly cash flow in the form of rents collected provides investors with advantages in economy of scale.

For example, a single large apartment building houses more tenants under one roof, as opposed to owning multiple single family homes across a larger area, increasing costs for property management and other operating expenses.

Plus, having a vacancy in a multifamily building is not the end of the world, since the rest of the tenants paying rent can cover the mortgage.

That’s why having more tenants limits any potential downside in scaling up to owning a multifamily investment property.

If a family moves out of a single-family investment property, who is on the hook for paying the mortgage? That’s right, it’d be you, the owner.

Owning multifamily investment properties allows investors to run their operation like a business. Full-time employees like property managers and maintenance staff can be hired to handle day-to-day operations, freeing up investors to manage and purchase more investment properties.

Conclusion

While no real estate investment can every rightly be considered a guaranteed home run, there are certain types of opportunities that offer more intrinsic benefits than others.

Multifamily investment properties, with their high demand and relative uniformity in best practice methods of acquisition and management, will continue to be a favorable niche for real estate investors looking for a smart way to grow their money and increase their wealth.

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