The moment people start planning of investing in multifamily properties, they are also planning to buy this property—which comes with multiple units—and renting it ahead to generate more income.
This is one of the options with multifamily properties and there are other options as well. However, becoming a landlord may not be the best option or the right direction for many.
When it comes to multifamily properties, there are three main ways to go about it. Apart from renting those properties, investors can also look at opportunities with crowdfunding, and many also opt for REIT (real estate investment trust) where they buy shares.
The best for every investor will differ and it will also depend on different factors such as capital and time that the investor wants to invest, the ability to tolerate risks, and the amount of income you expect in return.
Let’s elaborate on three key options for investment in multifamily properties, the best options, and the best approach according to a different kinds of investors.
Buying a multifamily property
One of the most prominent and obvious options for multifamily properties is buying it. You can own a ginormous penthouse, a triplex, duplex, or any other bigger property of your liking. It also comes down to leasing out the units for income generation.
Most often, if you have invested in over two multifamily properties, then it becomes residential property, whereas, over four units are considered commercial properties.
We cannot overlook some of the possible drawbacks that come attached with buying multifamily properties. For instance, buying a property is being fully invested—financially and physically—towards the property owned. Even when you hire the best manager to manage your property, you will have to give a considerable amount of time overlooking the property.
Even rental properties have shown signs of numerous inconsistencies when it comes to income. The maintenance and vacancy costs are becoming difficult to estimate with a certain degree of accuracy involved.
Also, the property taxes and property insurance costs show a year-on-year deflection. And, let’s not forget that rental properties over time become difficult to sell and therefore require more financial commitment.
On the brighter side, rental properties do give good returns, hence investing in them is not often a bad decision. If we look at the successful global real estate investors, a maximum of them have been successful in making the right investment decisions. Hence, go ahead and invest your money wisely.
Crowdfunding real estate investment
Still the nascent stage, crowdfunding real estate has given excellent results to the investors so far.
Here is how the crowdfunding process works:
Let’s assume, that a seasoned real estate investor is willing to buy a comparatively older property from the market for USD 10 Million. The investor will be spending USD 1 Million on renovations and adding updated amenities to the property.
Post these fixes, the property will be positioned in the market for renting out. Usually, after a five year holding period, the investor will be willing to sell this property for USD 15 Million.
However, let’s assume that the investor will only get a loan of USD 5 Million from the bank and has a little money of their own to invest. Therefore, to raise the remaining funds, the investor will opt for listing this property on a crowdfunding platform and offer some stakes to the investors in the property.
There are multiple trustworthy online crowdfunding properties, for example, CrowdStreet and Realty Mogul. These platforms keep adding opportunities for crowdfunding. So, this can be one option for investing in multifamily property.
To be realistic, crowdfunding is still a new entrant in the market and therefore it is considered as high-risk. The risk can be only justified with the return on investment received. Also, let’s not forget that given the renovations involved, there are some execution risks that everyone should consider.
REIT
One of the lowest-cost and easiest options available is REIT. The Real Estate Investment Trust is a special organization specially created to help investors with their money in the world of real estate.
Several REIT organizations are currently publicly traded, which means that you can buy these from a broker with one click, similar to buying stocks online.
According to the rule of REIT, every investor has to pay 90 percent of the taxable income to the shareholder, which is considered as the dividends. This income is further treated as a passive income investment, especially when associated with the retirement account.
Every REIT will often specialize in the only kind of real estate investment asset. They give the option of investing in commercial properties, office spaces, residential properties, and shopping malls as well. Out of these, many prefer to invest in residential real estate property.
The best option for you?
We all know that one fact that one size never fits all. The best option for a multifamily property depends on certain factors, so here we list a few things before you decide to choose the best option for yourself.
Funding requirement. We have given three different options for investment making funding options a little less difficult. Whenever you consider buying a multifamily property, it always better to be prepared and have at least 20 percent of the purchase price ready.
Also, always estimate the final closing cost and if there is any requirement for reserve funding. For instance, in REIT investment, you only have to buy one share of the company and you are good to go.
Involvement. Even if you get the best property manager in town, who looks after the complete property and manages the daily affair, it is important for you as an owner to considerably involved in this.
You will have to invest more of your time, especially in the beginning during the purchase phase. The other two investment options usually are passive, especially in multifamily property investment.
Liquidity. For multifamily properties, there are three options for liquidity. You have the option to sell the multifamily property whenever you desire, but it can take a while before you get the best offer on the property.
Also, when it comes to crowdfunding, your money will be tied up for some while. For REIT, it is up to you when you want to sell by simply deciding and going for it.
Income. If you choose to depend on solely your income, income must always be taken into consideration. When it comes to crowdfunding, it will never provide immediate income. For instance, if you are only looking for making money, you need to find the right multifamily property to invest in.
Risk. Every category comes with its own set of risks. Realistically speaking, crowdfunding real estate has the highest risk and the highest returns involved. Also, this particularly involves several execution risks, and other options usually produce stable income and also bring forth a steady income pace.
We would suggest weighing all your options, financial standing thoroughly before you freeze on one option and make the investment.
Things to remember:
- Multifamily housing is a conglomerate of housing, which is often not individually owned.
- Multifamily properties will always come with increased occupancy rates, even once the tenants have moved.
- Always know the market you are investing in and your asset class in question.
- Keep a check of all the risks involved, have complete control over things, and move on to mitigating.
- Single home financing is different as compared to multifamily financing.
- Weigh the pros and cons of all the options, and then make a plan, a plan that fits your financial standing perfectly.
Real estate is one of the fastest ways of growing your wealth but deciding where to begin can be a massive task. We hope that this article gives you the much-needed breather before finally plunging into investing for multifamily properties.
