Let’s first look at the advantages of buying a multi-unit property.
Cost per unit: Multi-family housing is generally cheaper. The cost of a duplex is less than the cost of two houses. Less debt and therefore less risk also means you have the potential to own more of your property than the bank.
vacancy rate
By definition, a multi-family property is never 100% vacant, which means there are always a few tenants to help pay expenses. What happens if you lose your tenant in your single-family home? You lose all your income and have to pay the mortgage with your savings. If you lose a tenant in a three-family house, he has only lost a third of his income. The other two units will help cover your mortgage until you rent out the vacancy. One of the reasons owning small apartments is smarter than owning single-family homes.
easier to finance
Get financing more easily. The money for commercial units was available even during the recent mortgage freeze. For a few weeks in late August and early 2007. I think this is because there is less risk, because multi-family housing is less expensive per unit, and because there are always some tenants to help cover the costs.
Financing is more available for multi-family homes because investment properties can be analyzed using financial ratios such as cash flow or capitalization rates. Lenders love being able to assess the investment value of a property. You can price a property based on cash flow performance or gross rents and create benchmarks. It is not emotional.
Maintenance
While you may have to deal with more toilet flap issues, because you have more toilets, there is still only a roof and base. This remains the same whether you have a two unit duplex or a ten unit property. Costs can be spread, and the cash flow of a well-managed building will help support maintenance much more easily than if it were a single-family home where only you pay the bills.
the market today
1. We have a real estate recession, mainly in the single-family housing sector. Sales are slowing down and will probably get worse before they get better. Rental rates, however, are on the rise. There are a few reasons why: For starters, when houses become too expensive, the monthly cost of maintaining the property starts to look very unfavorable compared to a monthly rent. When mortgage rates were very low, the monthly mortgage was often less than or equal to rent. That made home buying very attractive, but today the opposite is true.
2. Mortgage money may be easier to come by for a well-priced apartment building, because it’s an investment, and more transparent than buying a single-family home because cash flow is a good measure of real property value.
1031 Tax Advantages
Rental homes or business property (but not your personal residence) can be exchanged, tax-deferred, for other investment property. IRS Section 1031 makes it possible to exchange and even switch from a small rental property to a larger investment property worth much more, with little or no erosion of capital gains because it is possible to avoid capital gains tax . The government will effectively allow you to use the tax owed to them towards a higher down. Now 1031 exchanges are complicated and you should always have a qualified advisor before attempting one of these.
Disadvantages
Time Consumption: Multifamily ownership is a job. You need management skills, such as dealing with people, selecting tenants and all the necessary business skills, and the legal issues make it difficult. You need to assess your own skills and see if you have the desire to manage people and property. It can take a long time. A larger property, say 10 units or more, may allow you to rent and actually be easier than 2 or 3 units, where there is not enough income for a landlord to rent more than necessary.
Equity Appreciation: Multi-family homes do not appreciate in market value as quickly as investments in single-family homes. The reason is that apartments are valued at their “cap rate” or net operating income divided by the value of the property. For example, a small apartment building producing an annual net operating income of $10,000 (not including mortgage payments) and an asking price of $100,000 for the property equates to a “cap rate” of 10 percent. gold has a 10% rate of return.
Rent Control: Laws designed to protect the most vulnerable place a limit on the rent increases allowed in any given year. Therefore, some properties should be purchased only if a capital increase is on the cards. The only solution is when a rent controlled unit becomes vacant. Then the unit can be brought to market rent. If a tenant has been there for many years, that can be a significant increase.
Thank you for reading