Since 2015, I’ve been investing in real estate and have enjoyed the benefits. Real estate is not all that you see on HGTV, I promise.
I’ve been in courtrooms and some nasty houses and had tense discussions with tenants.
However, real estate is a sound investment, and the numerous ways the asset works for you are a multiplier.
However, as my career got busier and kids have gotten older (and multiplied), my time has gotten way more valuable. I do not have time to find these houses, renovate and handle the tenants’ phone calls.
My investments must receive the same impact without the time factor.
Enter: Commercial Real Estate
In Any Economy, Multifamily Investing Makes Sense
The demand for rental accommodation continues to outpace supply significantly.
The current status quo is that the rental housing supply needs to catch up 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 will 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 finds it more challenging to get the financing for property ownership, and the baby boomer generation favors downsizing and the increased freedom that allows it.
The result is that the demand for rental property is increasing.
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The combination of these two market factors gives a strong positive indication for sustained revenue growth in the multifamily sector.
The conditions remain favorable for multifamily investment in most locations for the foreseeable future.
Now, look at four more reasons why investing in multifamily makes good financial sense.
#1 Economy of Scale
The basic meaning of the economic term ‘economy of scale’ is that there is a real cost-saving benefit to being more extensive.
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 multifamily investing is more advantageous than single-family property?
For example, repairing the roof on your multifamily property after a year of rent collection is a better scenario than repairing a roof on a single-family property. Neither is desirable capex expense; however, there is more income from a multifamily property to protect your capital.
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 higher, and the management would be less efficient and less cost-effective than caring for one multifamily property of 10 units in one geographic location.
#2 Greater Control of Property Value
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 tied. Nearby property values determine your property’s value.
Multifamily properties are perceived differently due to their commercial nature. This puts the value in your hands.
A property can increase profitability and value by driving the Net Operating Income higher.
Something as straightforward as adding a laundry facility or paid parking are two examples that can very positively affect the profitability of your multifamily property and, in turn, its value.
With a multifamily property, there are many more ways toto bring your management and entrepreneurial skills to bear to increase the property’s value independently of the surrounding property market.
In a nutshell, you can raise the value of your multifamily property by decreasing expenses and increasing income.
#3 Positive Cashflow
In addition to the ideas mentioned previously, namely, adding laundry facilities and paid parking, you can add several amenities to a multifamily property to increase 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 multifamily property is vacant, the impact on your cash flow will be minor because you will still collect rent from all the other units.
#4 Tax Benefits
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 multifamily 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 multifamily property tax laws benefit you is by allowing you to use some of the cash flow from the property to pay down the mortgage.
Collecting revenue is permissible, but the IRS allows you to show a much smaller amount of income on your taxes.
This IRS rule allows you to 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, there are many other legitimate ways to capitalize on tax deductions, incentives, and even grants that the government makes available to multifamily property owners.
In the current fluctuating economic climate, multifamily properties are tangible assets representing an excellent focal point for your investment and wealth creation strategy.
Due to shorter lease terms that allow regular rent increases, multifamily assets represent less risk than other commercial real estate investments.
The overall 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.
Multifamily is and will continue to be a solid strategy for investors looking to achieve financial freedom by employing attractive, attractive, low-risk investment returns.