If you’re considering investing in real estate in 2022, you may be considering purchasing or financing a multifamily home. Unless you’re an experienced real estate investor, however, you may have questions about how to buy a multifamily property and the benefits or drawbacks of doing so.
At A and N Mortgage, our experts understand the importance of performing due diligence and making informed real estate investment decisions. This blog covers everything you need to know before buying a multifamily property in or around the Chicago area.
To learn more about responsible real estate investment, keep browsing our blog or reach out to our team with your questions today.
What is a Multifamily Property?
Multifamily properties are residential properties that house two or more liveable units. On the small side of the scale, multifamily homes are duplexes that house two families. As we move up the scale, multifamily properties include triplexes, complexes, and entire apartment buildings.
Typically, larger multifamily properties are considered commercial real estate. For this reason, these properties often qualify for different types of financing than properties with fewer than five units.
Single Family Home Investing vs. Multifamily Home Investing
If you’re a first-time residential property buyer, you may be wondering what the primary differences are between investing in single and multifamily properties.
The first difference is in price. Multifamily properties typically require more significant upfront financial investments due to the property’s market value, potential, and size.
Next, multifamily properties have unique valuation potential. These properties are typically more resilient to the economic downturn than single-family properties and have the potential for value revival in the event of real estate market crashes.
Another significant difference when investing in single and multifamily properties is the overall investment. Beyond initial costs, each property type carries unique financial, managerial, and maintenance responsibilities. These responsibilities are much more significant with multifamily properties.
Benefits of Investing In a Multifamily Property
While investing in all residential properties carries unique risks and drawbacks, there are often considerable benefits.
Passive Income
The most obvious benefit of investing in a multifamily property is the potential for passive income. When properly managed and marketing, multifamily real estate investing provides owners with two or more liveable units that owners can rent out, sublet, or even sell.
Renting and subletting provide daily, weekly, and monthly passive income, generating revenue for multifamily property owners, even if they choose to live on the property.
Potential Value Increases
Like a single-family home, multifamily residential properties have the potential to increase in market value over time.
Because these properties house multiple liveable units, they tend to have some occupancy level even during an economic downturn. As rent levels increase locally, the potential value of a multifamily property increases in tandem.
Additionally, the scalable nature of many multifamily properties boosts their value. Over time, owners can expand these properties to include more units or amenities, increasing passive income potential.
Reduced Risk
Compared to other real estate assets, experts consider multifamily properties to be relatively safe investments. Recessions and economic downturns force many single-family property owners to sell their homes and relocate to rental housing.
Responsible multifamily property owners provide a valuable service and have the opportunity to positively impact the surrounding community during difficult times. As a result, multifamily properties often weather recessions better than other real estate assets.
Fewer Loans
If you’re already considering investing in multiple properties, a multifamily property is a great way to reduce the number of loans you need to fund your venture.
Typically, buyers can purchase a multiple-unit property with a single bank loan, while buying multiple single-unit properties would require several individual loans, each with its own interest rate. If you’re ready to invest in numerous properties, consider consolidating your financial responsibilities by purchasing a multifamily home.
Scalability
Investing in multifamily properties doesn’t have to be a massive commercial investment. One of the most significant benefits of this real estate asset class is that new investors can start on a smaller scale. Buying as small as one two-unit property allows investors to grow their portfolios slowly, which allows for careful investing and responsible asset management.
Tax Benefits
Finally, multifamily real estate offers property owners significant tax advantages.
Many multifamily property investors use a mortgage to finance multifamily homes. The mortgage interest paid each year is tax-deductible and is often higher during the first few years of loan repayment.
Additionally, property depreciation can help offset passive income from unit rentals each year, reducing the overall tax burden that the property owner faces. This benefit makes multifamily properties attractive to real state investors at every level.
Drawbacks of Multifamily Property Investing
As with every real estate investment class, multifamily properties aren’t for every investor. Before purchasing, new or aspiring investors should consider some potential drawbacks to multifamily property investment.
Upfront & Longterm Cost
One of the most significant risks of investing in multifamily properties is initial investment costs. Per their potential value, multifamily properties tend to sell for higher prices than single-family homes. This means investors must make larger initial investments, including down payments and more.
Over time, multifamily properties also cost more to operate and maintain than single-family properties. Investors must plan to cover these costs if that unit rental proves challenging or slow.
Management Intensity
If you’re planning on managing your multifamily property yourself, it’s wise to consider what that might mean. Beyond the financial investments necessary to maintain and operate a multifamily property, this type of real estate also involves the investment of your time.
Expect to handle leasing and lease enforcement, unit maintenance, tenant complaints, whole property upkeep, etc. What tasks you don’t manage yourself, you’ll need to hire professional services to take care of, increasing your overall long-term costs.
Competition
Because multifamily properties represent significant profit opportunities when well-managed, many commercial real estate investment firms often compete for these properties. Competition drives up market prices and makes it challenging for smaller-scale investors to make successful bids.
Factors to Consider Before Investing
If you’ve weighed the pros and cons of multifamily property investment and are ready to proceed, there are several factors you should keep in mind during the buying process.
Location
First and foremost, evaluate the location of any multifamily property you’re considering for purchase. Location plays a considerable role in the popularity of any residence. Ask questions such as:
- Is the property easily accessible?
- Does the property have access to jobs, entertainment, and other amenities?
- What is the state of the neighborhood where the property is located?
Number of Units
When considering your overall investment, it’s essential to remember the likelihood of recuperating your monthly and long-term costs through passive rental income. Make sure your property has enough units to sustain the level of passive income you need to maintain the property effectively.
Initial and Long-term Costs
To achieve success in real estate investment, it’s critical that investors not bite off more than they can chew. Carefully weigh your initial and long-term costs against potential revenue from units, and assess your financial risk as accurately as possible.
Management Needs
As we mentioned above, the management and upkeep needs of a multifamily property can be challenging for some investors to handle. Before you purchase any property, consider the immediate and long-term management needs of that property, including:
- Unit advertisement
- Unit upkeep
- Unit maintenance and repair
- Lease management
- Lease enforcement
- Tenant responsibilities
- Overall property upkeep
Remember that hiring professional services for these tasks may save you some time, but it will also impact your long-term costs and overall financial investment.
Competition
Finally, it’s wise to anticipate competition. Above, we described commercial real estate competition as a potential drawback for investing in multifamily properties. Responsible small-scale investors have “backup” properties and bids in case of a bidding war with high-stakes investors.
Additional read: Why the FHA Self-Sufficiency Test Is So Important For First-time Investors in 3- or 4-Unit Properties
How to Buy a Multifamily Property Responsibly
Investing in a multifamily home doesn’t have to be a high-risk project. Any aspiring property owner, especially those considering buying a multifamily home, can cave themselves in time, money, and stress by doing the due diligence on every property they consider for purchase.
The best place to start any property investment journey is to examine the property values in the area you plan to purchase. Speak with one or more professional real estate experts, look at market listings, and speak with other property owners. Doing so will help you get a firm idea of your financial and personal investment scope, what you will need to get started, and more.
If you’re considering investing in a multifamily home in or around the Chicago area, A and N Mortgage is here to help. To learn more about how to buy a multifamily property or to request a consultation, reach out to us by calling 773-302-5626 today.
A and N Mortgage Services Inc, a mortgage banker in Chicago, IL provides you with high-quality home loan programs, including FHA home loans, tailored to fit your unique situation with some of the most competitive rates in the nation. Whether you are a first-time homebuyer, relocating to a new job, or buying an investment property, our expert team will help you use your new mortgage as a smart financial tool.
