When investing in real estate, there are always a few questions that must be answered before you start.
One of the most basic is: What types of property make the best investments?
Mixed-use properties have a different set of benefits and challenges than strictly residential.
Multi-family properties can produce more income, but they also come with larger expenses. Single-family homes may be easy to start, but they have hidden costs down the road.
Many investors swear by multi-family properties as the best investment, and they’re not wrong.
Pros of Multi-Family Properties
The benefits of multi-family properties can be summed up in three simple phrases:
- Lower taxes
- Lower vacancy rates
- More convenience
Pay Less in Taxes
Paying property taxes on a single building is typically much less burdensome than paying on separate properties.
This is usually due to one major factor: lot size. Larger lots come with higher tax assessments.
With multi-family dwellings, landlords only pay for one outdoor space (otherwise known as space that doesn’t earn) versus several.
Keep Properties Occupied
Another benefit to multi-family properties is the simple fact that apartments never stay rented 100 percent of the time.
There will be turnover.
In a single-family home, that means the entire property fails to earn when a tenant moves on.
In a multi-family property, staggered rental agreements help ensure that the landlord is never holding a property with no positive cash flow.
Managing properties can be challenging, particularly when first getting started in the business.
Juggling insurance payments, rental applications, tenant notifications and legal proceedings like evictions is difficult for inexperienced managers.
Add on the challenge of property checks and maintenance scheduling, and it is easy to wind up spending more time on the road than at a rental property.
When all the units are in one place, it is much easier to schedule one day to visit every unit.
This cuts down on travel time, and it can also help minimize major system expenses. For example, landlords only face one roof repair per building, not per residence.
Cons of Multi-Family Properties
With all the obvious benefits, it may be difficult to see the downside, but there is one, and it is big — expenses.
Multi-family properties are more expensive to buy and more expensive to up maintain.
Yes, there is only one roof and one foundation, but there are several kitchens and bathrooms.
There might be a shared laundry room or individual washers and dryers in each unit.
Regardless, what that boils down to is lots of appliances that the landlord has to pay for.
Of course, the same would be true for a landlord who owned several individual properties, but there are some extra cautions that go with multi-family dwellings.
A leak in an upstairs bathroom can ruin several apartments, not just one.
A problem with a water heater might flood a downstairs neighbor.
A fire from a malfunctioning oven can cause smoke damage throughout a property.
This is on top of the higher price tag attached to any obviously commercial venture and the added cost of obtaining property licenses and insurance.
Multi-Family Is Still the Better Bet
The bottom line is that any investment holds an element of risk, but multi-family properties help offset many of the risks associated with real estate.
As long as the price is right, the location is good, and the numbers make sense, a multi-family property stands to make more money now and in the long term.