Create Passive Income Through Multifamily Investing
Real estate investors have many options for their investments, with many different types of properties to consider. Real estate investing may seem overwhelming to the new investor. While considering types of properties to invest in, multifamily properties make your list. From passive income to tax advantages and more, there are many unique benefits of multifamily properties for investors. In this article, we’ll discuss some of the top reasons to consider adding multifamily property investments to your portfolio.
What is a Multifamily Property?
Any property consisting of two or more housing units is a multifamily property. Properties are as small as a duplex to as large as an apartment complex with hundreds of units. Smaller properties consisting of four or fewer housing units are considered residential multifamily properties, while properties with more than four units are considered commercial properties.
The Strong Demand for Multifamily Properties
There are always people who want or need to rent rather than buy. Creating a virtually “endless” pool of potential tenants makes multifamily properties especially attractive investment opportunities to all types of investors.
- Homeownership declining. According to census.gov, homeownership has been on the decline since 2005, with only a small uptick in 2020. As property values continue to rise, young people are finding it more difficult to afford their first home. That increases demand in the rental space and should drive up rent prices as well. That’s a win/win for multifamily investors.
- Increasing rental demand. Renter-occupied housing units have been on a steep increase since 2006.
- Apartment vacancy declining. Rental vacancy rates in the US have been in a downward trend since 2010. Nearly 39 million people live in apartments today, and the industry is quickly exceeding capacity.
- Production is short of demand. It will take building an average of at least 325,000 new apartment homes every year to meet demand. Yet, on average, just 316,000 apartments were delivered from 2012 through 2020. If progress continues at this pace, there will continue to be strong demand for rental properties, with demand exceeding available units.
Property Improvements Can Increase Asset Value
The value of traditional investments such as stocks and bonds is determined by the markets. With a multi-family property, however, you can perform improvements to increase the asset value, and the ability to increase rents.
A strategic strategy for many multifamily property investors is to seek out underperforming properties, then increase property value by adding modern amenities, performing interior and exterior renovations, upgrades, and more. Apartment buildings provide the opportunity to actively increase property value and revenue by making improvements to the property that can allow you to increase rental rates and attract more tenants.
No investment is guaranteed, and past performance is not indicative of future performance, apartment buildings have historically provided greater returns compared to other types of real estate. According to a study by the National Multifamily Housing Council (NMHC), apartments dominate holding period returns and risk-adjusted returns for 3, 5, 7, 10 and 15-year holding periods.
Hedge Against Inflation
Inflation negatively impacts many sectors. But historically it hasn’t been the case for real estate. During periods of inflation, both property values and rental rates have tended to increase significantly. This makes multifamily properties a potentially viable investment to hedge against inflation as part of a diversified portfolio.
Risk is Minimized in Multi-Unit Buildings
In multifamily properties, all tenants contribute to the income for the property. Losing a few of your tenants in a 100-unit building isn’t going to impact the property’s gross income as much as if you lost your sole tenant in a single-family property or a major tenant in a commercial building.
There are several tax benefits of investing in multifamily properties, including:
- Depreciation. Property depreciation can be written off, so you can keep more of your income in your pocket.
- Mortgage Interest Deduction. Any interest paid on the mortgage for a multifamily property can be deducted at tax time.
- Capital Gains. Income generated through the sale of an asset is considered a capital gain. This income is taxed differently than regular income. Real estate properties held for more than a year before the sale would be considered long-term capital gains, which are generally taxed at a lower rate than typical income or short-term capital gains (held for less than one year).
Property Management is Easier
Taking care of one multi-unit building is simpler than doing maintenance and repairs in multiple single-unit structures. It’s also cheaper if you break it down by cost per unit because many of the systems require repair services for all the tenants.
Growth Markets Easy to Spot
Buying a newer apartment building on the outskirts of an expanding urban area can pay off for you. As the population of the city increases, more folks will be looking for out-of-town living options. Additionally, there is an opportunity in searching out undervalued or underperforming buildings in high-demand areas that can be renovated or improved to increase the value substantially.
Get involved in Multifamily Properties Today
Are you interested in the possibility of generating passive income through multifamily investing? Vertex Markets can help. Our team specializes in CRE & Multifamily real estate Projects and can walk you through how to get started. The benefits are clear, and the process isn’t complicated. The best time to get started is right now because property values continue to rise. Contact us today to learn more.