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How to Successfully Invest in Multi-Family Real Estate

As we approach 2023, many investors are looking for smart investment strategies. Whether you want to expand your investment portfolio or jump into real estate investing, multifamily housing can be an excellent option. After all, small multifamily homes are highly profitable and a great choice for investors looking for large profit margins. So, if you want to learn how to invest in multifamily real estate, just keep reading. 

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Contents of This Article: 

What Is Multifamily Real Estate?

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Multifamily real estate is a single property that can be divided into multiple housing units. These buildings are designed to house several tenants in separate units within one large structure. For example, some types of multifamily properties include apartments, duplexes, and townhomes.  

While the name suggests that multiple families live in this type of property, it can also be single people or roommates. After all, anyone can live in an apartment. So, if you own multifamily properties, you’ll likely have a diverse group of tenants. 

Many investors opt for multifamily housing because they offer high returns, they’re relatively easy to finance, and there’s always demand for them. Now, let’s go over the pros and cons of this investment type. 

Pros and Cons of Investing in Multifamily Real Estate

Like any type of investment, investing in multifamily real estate has some advantages and disadvantages. If you’re thinking about how to invest in multifamily real estate, consider these pros and cons

Benefits of Multifamily Real Estate

  • Higher Cash Flow- Multifamily properties offer higher returns since you get monthly rent payments from several tenants. 
  • Tax Benefits- There are tax benefits with any type of real estate investment. You can write off most repairs, mortgage interest, and other business expenses for a multifamily property. 
  • Easy to Finance- Since the cash flow is more predictable with a multifamily unit, banks make it easier to find lower interest rates for financing. 
  • Scalability- If you’re looking to grow in the real estate industry, multifamily properties are a great way to do so. In addition, you can expand from multifamily to commercial properties, offering even more cash flow opportunities. 
  • Larger Tenant Pool- Multifamily properties have more units to work with, so you can take on a larger pool of tenants. In turn, you can pay off your investment more quickly.

Disadvantages of Multifamily Real Estate

  • Higher Initial Cost- Investing in a multifamily home is more expensive than other investments, like a single-family home. So, you’ll need a larger down payment and larger loan payments. 
  • Harder to Manage- It’s hard for one landlord to manage several rental units. So, if you own multifamily units, you’ll want to hire Washington, DC, property management. 
  • More Competition- Multifamily rentals are very competitive, and you may compete with other investors over properties. So, prepare to go up against other investors and make solid offers. 
  • Responsibility- As a landlord, you’re responsible for the repairs and renovations in your multifamily properties. So, be prepared to complete repairs or hire Washington DC property management to help keep your rentals in top-notch shape. 

Why Would You Invest in Multifamily Real Estate?

Before investing in multifamily real estate, it’s essential to know how it’s beneficial and why you should invest in the first place. That said, here are three reasons why you might invest in multifamily real estate

  1. Earn Passive Income
  2. Expand Your Portfolio
  3. The Timing Is Right

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Passive Income

One of the biggest reasons for investing in multifamily real estate is the opportunity for significant returns and passive income. Compared to smaller investment properties, multifamily properties have several tenants, meaning more people pay rent each month. As a result, landlords can sit back and watch the passive income roll in.  

Build a Portfolio

Another reason many investors choose multifamily real estate is to grow or diversify their portfolio. If you’re a newer investor wanting to branch out and diversify your investment types, you may consider purchasing a multifamily building. After all, buying one building with several units is easier and more efficient than purchasing several buildings to rent out. 

The Timing Is Right

Finally, another reason you may consider investing in multifamily real estate is a hot and competitive market. In fact, you may not plan for a multifamily investment–it may just be a great opportunity that you can’t pass up. For instance, if you come across a multifamily property for an affordable price that you think could bring in significant cash flow, you might want to go for it.

Tips for Choosing a Multifamily Investment Property

If you’re considering a multifamily property investment, there are a few steps you’ll want to take to ensure profitability. Read along as we go over some tips to think about before investing

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  • Research the Market
  • Consider the Location
  • What’s Your Budget?
  • Estimate Profitability

Research the Market

The first step before making any type of investment is research. For a real estate investment, you’ll want to research the current market and determine the demand for multifamily housing. Additionally, choose what type of property you’re going after–a small multifamily building?, A large apartment complex? The market may differ depending on what type of property you’re looking to buy. 

Consider the Location

Location is one of the most critical factors of any investment property. While researching, look at different locations and see how rental rates, amenities, and demands differ from place to place. With that, some locations will have more expensive multifamily properties, while other neighborhoods may have more affordable properties for sale. 

What’s Your Budget?

You can’t forget about your budget. Finding properties that fit your budget without needing significant repairs is essential. After all, if you go over budget on the property, it may be harder to finance renovations or considerable maintenance. Ultimately, you want to find a property worth the price and guaranteed to make substantial returns. 

Estimate Profitability

Finally, before making a major investment, you want to ensure it’s profitable. Most investors have the same goal in mind–cash flow. So, what type of return are you looking for? You can use a few calculations to estimate any investment’s profitability. Here are a few common tips. 

estimate-profitability

  • 50% Rule: Plan for around 50% of profits to cover expenses
  • Monthly Cash Flow: Property’s NOI – Mortgage Payment = Cash Flow 
  • Cap Rate: Annual NOI / Property’s Current Market Value = Cap Rate

Once you’ve crunched the numbers, make sure you compare them with other properties to determine which one is best for your business. 

Importance of Property Management for Your Multifamily Rental

Multifamily rental properties require a lot of maintenance and attention. After all, when you have several rental units with several tenants, there’s a lot of maintenance, paperwork, and communication to manage. That’s why many landlords hire property management for their multifamily rental properties. 

Need More Advice? contact us today!

Bay Property Management Group offers comprehensive management services to investors, whether it’s for one rental or 100. Our team of skilled professionals can help manage your rental business, so you don’t have to worry about the day-to-day tasks of owning properties. 

If you’re looking for full-service rental property management, contact BMG today. We offer services in Baltimore, Philadelphia, Northern Virginia, and Washington, DC.