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The demand for rental accommodation continues to outpace supply significantly. The current status quo is that rental housing supply is falling short by hundreds of thousands of units annually across the United States. According to The National Multifamily Housing Council and The National Apartment Association, this situation looks set to continue for many years.
Current demographic preferences reveal a trend at both ends of the age spectrum for renting instead of owning. The younger demographic is finding it more challenging to get the financing for property ownership, and the baby boomer generation favor downsizing and the increased freedom that allows. The result is that the demand for rental property is rising.
The combination of these two market factors gives a strong positive indication for sustained revenue growth in the multi-family sector. The conditions remain favorable for multi-family investment in most locations for the foreseeable future.
Now, look at four more reasons why investing in multi-family makes good financial sense.
The basic meaning of the economic term ‘economy of scale’ is that there is a fundamental cost-saving benefit to being bigger.
To quote Investopedia, an ‘economy of scale’ is an advantage “that arises with increased product output. Economies of scale arise because of the inverse relationship between the quantity produced and per-unit fixed costs.”
How does this concept apply to the argument that multi-family investing is more advantageous than investing in single-family property?
For example, if you have been collecting rent on ten units for twelve months from your multi-family property, and then the roof needs fixing, that’s a much better scenario than collecting one rent for twelve months on your single-family property.
The rationale applies even more if you add more single-family properties to the equation. The cost of managing ten individual properties, which could be spread across multiple states, and hiring different contractors to care for each one would be punitive. The cost would be much more significant and the management less efficient and cost-effective than caring for one multi-family property of 10 units in one geographic location.
With a single-family property, you are almost entirely at the mercy of market forces.
If you need to sell in a down market your hands will be relatively tied. The value of your property will be determined by what other properties have sold for in the local area at that time.
A multi-family property is perceived somewhat differently because of its commercial nature. It is managed and run as a business, and therefore a significant part of its value is determined in the same way as a business. The value is much more in your own hands.
Businesses are mainly valued on their profitability, and a multi-family property’s value is determined by its net operating income.
Something as straightforward as adding a laundry facility or some paid parking are two examples that can positively affect the profitability of your multi-family property and, in turn, its value.
With a multi-family property, there are many more ways that you can bring your management and entrepreneurial skills to bear to increase the value of the property independently of the surrounding property market.
In a nutshell, you have the ability to raise the value of your multi-family property by decreasing expenses and increasing income.
In addition to the ideas mentioned previously, namely, adding laundry facilities and paid parking, many amenities could be added to your multi-family property to keep a positive cash flow.
In addition, the adage of not having all your eggs in one basket applies here, also. A tenant vacancy in a single-family rental property will bring your cash flow to a grinding halt. In contrast, if one of your units in your multi-family property is vacant, the impact on your cash flow will be minor because you will still be collecting rent from all the other units.
One of the great things about supplying housing for the populace is that you are helping the government fulfill one of its essential responsibilities. Not surprisingly, in return, the government offers you certain tax advantages.
One of the most significant tax advantages for multi-family property owners is the ‘depreciation deduction,’ in effect, it can allow you to deduct a large amount of the income your property generates. For details on how it works, take a look at the following Investopedia article, How Rental Property Depreciation Works.
Another way multi-family property tax laws benefit you is that you are permitted to use some of the cash flow from the property itself to pay down the mortgage.
It is permissible to collect revenue but show a much smaller amount of income on your taxes. You can take a portion of that rental income and use it to pay down your debt on the property, which will steadily increase the equity.
With the help of a good tax advisor, you may find many other legitimate ways to capitalize on the tax deductions and incentives and even grants the government makes available to multi-family property owners.
In the present fluctuating economic climate, multi-family properties are tangible assets that represent a good focal point for your investment and wealth creation strategy.
Due to shorter lease terms that give room for regular increases in rent, multi-family assets represent less risk than other commercial real estate investments.
The general demographics are also favorable. The steady increase in the number of professionals in the workplace, families, and empty nesters looking to downsize and simplify their lifestyle means that focusing on the multi-family market makes sense.
Multi-family is and will continue to be a solid strategy for investors looking to achieve financial freedom utilizing attractive, attractive, low-risk investment returns.
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