Should You Invest in Multifamily Real Estate?

Are you wondering whether you should invest in multifamily real estate in 2023? Read on to find out what the market holds for investors.

There are many ways one can invest in real estate. One of the largest classes of investment properties is multifamily real estate. Investing in multifamily real estate can help you create a consistent stream of passive income, build your portfolio, and enjoy numerous tax benefits.

Table of Contents

1. What Is a Multifamily Real Estate Property?
2. Pros and Cons of Investing in Multifamily Real Estate in 2023
3. How to Look for a Profitable Multifamily Real Estate Property

With the rising interest rates, slumping returns, and predictions for a recession, what does the future hold for multifamily real estate investing? Where do you need to invest in multifamily properties?

In today’s article, we’re going to look at the pros and cons of investing in multifamily properties in 2023. We’re also going to see how you can find profitable multifamily properties in the US housing market.

What Is a Multifamily Real Estate Property?

A multifamily real estate property is a residential property that contains more than one housing unit. The units can be occupied by several tenants. If the owner decides to reside in one of the units, the property is referred to as owner-occupied.

If you invest in a multifamily real estate, you should expect a few key differences compared to investing in a single family home.

For example, tenant turnover and high vacancy rates in a single family home can significantly affect your rental income since you can only accept one tenant at a particular property at a time. It isn’t the case with multifamily properties.

While you require a higher capital investment than with single family properties, multifamily real estate properties assure you of fewer gaps in your monthly rental income and cash flow.

That said, let’s look at the various types of multifamily properties below.

Types of Multifamily Real Estate

There are different types of multifamily real estate properties that you can invest in based on your style, goals, and approach. They include:

1. Apartment Buildings

Apartment buildings are the most common type of multifamily real estate property. The number of apartment buildings in the US real estate market is about 22 million.

The main advantage of investing in apartment buildings is the high tenant turnover. While many people would think of it as a downside, you can always use it as an opportunity to adjust your rental rates to match the current market values.

The only potential downside is that such properties are more demanding in terms of management and upkeep. Unlike smaller rental units, you’ll need to work with a dedicated property management team and also schedule regular maintenance.

2. Duplex, Triplex, and Quadruplex

Duplexes are multifamily buildings that consist of two units. Triplexes and quadruplexes comprise three and four units, respectively. In most cases, the units share walls and are identical.

Such multifamily properties are suitable for newbie investors since the designs feature a smaller number of rental units. Fewer units mean that the multifamily property will be less demanding. You won’t need to dedicate as much time to management and maintenance.

3. Townhomes

Townhouses are multifamily properties that can host two families living in one house but separated by an interior wall. Both families rent their spaces individually and use separate entrances.

Such types of multifamily real estate are suitable for tenants who desire some privacy in a city or metro area. While they share a wall, the units are quite spacious and can include amenities, such as private areas and garages.

Some people refer to such multifamily properties as “garden apartments” due to the private outdoor spaces. If you’re not interested in renting out your investment property, townhomes can be great for buy and hold strategy.

4. Condominium complexes

For investors who desire to own multifamily properties that require less maintenance, condos make suitable investment properties. Most homeowners association (HOA) fees take care of the management and maintenance.

Condos are an excellent multifamily real estate investment opportunity in desirable markets, such as tourist cities or popular destinations. You can invest in one condo in a complex or buy an entire complex.

As mentioned above, choosing the most suitable multifamily real estate property for you depends on your goals and investment style.

For example, if your priority is high returns, you want multifamily properties that will host more tenants to give you a higher monthly rental income. In this case, apartment buildings may be the most suitable investment.

If you want to keep your maintenance costs relatively low, you might decide to put your money in duplexes, triplexes, and quadruplexes. However, such properties are also likely to produce lower returns compared to apartment buildings.

Related: 5 Things You Need to Know About Investing in a Condo

Pros and Cons of Investing in Multifamily Real Estate in 2023

So, what’s it you need to know before you invest in multifamily real estate in 2023? Here are the pros and cons of multifamily properties:

Pros of Multifamily Properties in 2023

Let’s start by looking at some of the positives of owning multifamily real estate properties in 2023:

1. Hedge Against Inflation

Many experts continue to foresee a looming recession in 2023. The coming one could be a bit more severe than the brief one we saw in 2020 when COVID-19 almost brought the global economy to its knees.

According to AI and machine learning algorithms, you can expect the recession to occur by October 2023. How is it an advantage for multifamily real estate property investors?

Firstly, many lenders and financial services providers are reluctant to offer loans and mortgages during a recession. It delays new real estate developments. Remember, the population is still growing, so the demand for housing grows yet it’s not met.

Renters are compelled to continue renting properties as they’re priced out of owning real estate by the high home prices and interest rates. As such, multifamily property occupancy rates tend to remain strong during difficult economic times.

Secondly, multifamily properties offer investors an opportunity to adjust their rental rates as frequently as every 12 months to match the market condition. Multifamily properties offer you the flexibility to reset your pricing to cover rising operation costs and meet demand.

2. Steady Cash Flow

Keeping multiple tenants on your multifamily real estate property stabilizes your monthly cash flow. It is mainly because you lower the chances of experiencing vacancies on your rental property.

If some of your units stay vacant for a while as you keep looking for tenants, you can still continue earning monthly rental income from the occupied units.

For example, if you own a quadruplex and one tenant moves out unexpectedly, your monthly cash flow only drops by 25%. If the same thing happens in a single family unit, you lose 100% of your monthly income.

You’re also likely to get tenants who are looking for multi-year leases. Such leases will help you shorten the gap between vacancies.

However, there’s also a potential downside to it. Multiple tenants can also cause extensive damage to your multifamily property. Since the utilities are used frequently, they might break down faster. You’ll need to replace them or get them maintained frequently.

3. Easier to Finance

The fair market value for multifamily real estate is always significantly higher than that of single family homes. However, it is an advantage when it comes to securing financing.

Many financial services providers are aware of the benefits of multifamily real estate investments. They recognize the multiple tenants and steady rental income you can attract with multifamily properties.

Multifamily real estate properties are less risky for banks and other financial providers since the cash flow means that you’ll afford the monthly loan payments.

As such, investors are able to access diverse financing options with favorable interest rates. In addition, you can even purchase multiple multifamily properties all under one loan.

If you want to access favorable lending terms and requirements, it’s better that you find a lending service that specializes in commercial real estate.

4. Easy to Insure

Investors can choose among a wide range of insurance premiums when getting insurance coverage for their multifamily real estate properties.

Just like financial services providers, insurance providers are also familiar with multifamily properties. They offer diverse policies to cater to both residential and commercial multifamily real estate.

The best thing about it is that if you’re investing in multiple multifamily properties, most agencies will allow you to include all your investments in a single insurance policy. However, you should expect to pay a large insurance premium if you’re investing in a large apartment building or condo complex.

5. Highly Scalable

As an investor, you’re most likely looking to scale and own multiple real estate properties. Multifamily properties are a faster way to scale than single family properties.

With the latter, you’ll need to acquire one real estate property at a time. Keep in mind that the time taken to get financing and repay your debt can also lengthen the time you take to invest.

Multifamily properties are also an excellent entry point into commercial real estate. It is due to the fact that multifamily properties with five or more rental units are considered commercial real estate. You can also benefit from the value additions, such as fitness centers, laundry services, and dog parks.

6. Unique Tax Benefits

Multifamily rental properties offer investors sweet tax benefits. You can benefit from tax deductions, such as:

• Management
• Maintenance
• Marketing fees
• Repair costs
• Insurance
• Utility bills

Any costs that are associated with getting new tenants and ensuring your multifamily investment property stays in top shape can be written off as marketing and maintenance costs.

In the long term, you can also benefit from real estate depreciation and cost segregation tax advantages as your real estate property and appliances continue to age. It can happen despite the fact that the fair market value of your property could be rising.

Keep in mind that the said tax benefits attract many real estate investors, therefore making the multifamily property market extremely competitive.

7. Potential Passive Income

If you don’t want to be involved in the management tasks that come with owning rental property, multifamily properties give you a great opportunity to invest passively.

You can hire a property management agency to find tenants, handle rent payments, schedule maintenance and repairs, and basically handle everything. It will leave you with very little to do when it comes to the day-to-day running of the multifamily property.

Passive investments give you the flexibility to focus on your day job or find the next real estate investment.

Related: How to Make Passive Income with Real Estate: 3 Strategies

Cons of Multifamily Properties in 2023

While there are many benefits to enjoy from multifamily real estate, it’s not all rosy. There are a few potential downsides that you must be aware of before investing your hard-earned cash in 2023. They include:

1. Higher Operational Expenses

When investing in multifamily real estate in 2023, you need to be aware of the operational expenses. While inflation will help you enjoy steady occupancy rates, the downside is that operational expenses and repair costs will rise.

Higher operational expenses mean you’ll need to pay more from your monthly income. It leaves you with less profit. If you’re not enjoying a good occupancy rate, you may even be compelled to pay for the expenses from your own pocket.

2. Higher Initial Investment

Multifamily properties offer investors many benefits compared to single family properties. However, there’s no denying that the upfront cost is considerably higher. Even smaller apartment buildings with two to four units will cost a few million dollars in hot markets such as New York.

Most banks are willing to provide you with financing for multifamily real estate. Keep in mind that you’re still required to raise at least 20% as a down payment. If the purchase price is high, the down payment is high as well.

The said cost factor restricts many newbie investors from investing in multifamily real estate.

3. Stiff Competition

Many real estate investors are aware of the various benefits they get to enjoy from multifamily rental properties. It is causing the interest in such properties to rise, thereby increasing the competition.

When multifamily developers, investors, and even property managers scramble for their share of the cake, the prices will keep going higher. Investors who are able to purchase multifamily real estate properties in cash make it even harder for newcomers to get started.

4. More Management Tasks

If you’ve managed to secure the down payment and looked at ways to beat your multifamily real estate competition, your work is still not yet over. You will still need to manage the multiple units, which will require a lot of attention, time, and maintenance.

You might still be a novice yet to familiarize yourself with multifamily property management or you want to earn passive income. In this case, the best course of action for you would be to hire a property management company to handle all the relevant tasks for you.

How to Look for a Profitable Multifamily Real Estate Property

Have you already made up your mind to invest in multifamily real estate in 2023? How do you actually start from?

Like many other ways of investing in real estate, multifamily properties also require in-depth scrutiny and careful execution.

Here’s a step-by-step process to help you succeed:

Step 1: Start With the Basics

If you’re just getting started in multifamily real estate investing, you might want to dedicate some time to get educated. While you don’t necessarily require a real estate license or any certification, you need to learn the basics of multifamily investing.

Luckily, there’s a ton of readily available multifamily real estate material online for you to consume. There are many YouTube channels, blogs, e-books, and courses to help you get started.

However, the main issue with this is that you may not know which specific platform will serve you best. You may need to sift through hundreds of materials before finding one that works for you.

This is why we recommend Mashvisor. You can check out our real estate blog, YouTube channel, and podcast to find valuable content to help you get started with multifamily properties and any kind of real estate.

Related: How to Start a Career in Real Estate Investing

Step 2: Choose a Top-Performing Multifamily Market

Your location is an important aspect of your investment. It determines how much rental rates you can set, as well as the expenses you must pay for your multifamily real estate property.

It is why you should concentrate on the investment market once you’ve learned some investment basics.

So, how do you actually select the best place to find multifamily real estate?

You can divide the process into two crucial parts: choosing a city and choosing a neighborhood.

Select a City

Many factors go into selecting good multifamily real estate investment cities. Some pointers for you to consider include:

• Strong economy
• Growing job market
• Population growth
• Low unemployment rates
• A high number of renters

After shortlisting a few cities, it’s time to look for a suitable neighborhood for multifamily property investment.

Select a Neighborhood

For investors to select a profitable multifamily real estate investment city, they must carry out a comprehensive neighborhood analysis. It is important since there are different neighborhoods within the same city where the rental income and return on investment are different.

Carrying out a neighborhood analysis manually can take weeks, if not months. You need to collect copious amounts of data, analyze it carefully, and carry out all the necessary calculations. It can expose your analysis to a lot of errors.

However, Mashvisor allows you to perform a neighborhood search in just a matter of minutes. Firstly, the real estate heatmap allows you to filter out neighborhoods based on:

• Median property price
• Long term rental income
• Short term rental income
• Long term cash on cash return
• Short term cash on cash return

Once you’ve found where to invest in multifamily real estate using the heatmap, you can perform a deeper analysis using the neighborhood analysis pages. The pages provide you with every single metric and data point you need to analyze a neighborhood.

Step 3: Find Lucrative Multifamily Real Estate for Sale

After looking at where to invest, it’s now time to get to the fun part: finding profitable multifamily properties to invest in.

The major issue that many investors face is that multifamily properties aren’t categorized as their own type of real estate. It makes it hard to specify your search for multifamily properties during your search.

However, the listing will tell you what number of units in a particular property. All you need to do is look for properties with two to four units.

You will also need to narrow down your search to properties that match your budget based on the property listing price.

Mashvisor’s Property Finder allows you to search for multifamily real estate properties in any market in the United States. You can customize your search using the following filters:

• Budget
• Optimal rental strategy
• Property type
• The number of bedrooms and bathrooms

Once you’ve set up your search criteria, the multifamily real estate property listings will be listed by order of performance. In short, the top-performing multifamily properties will appear first on the search results.

Step 4: Analyze Multifamily Property Listings

By this point, you have a few potential multifamily real estate investment properties. You want to analyze them further to see which one of them matches your financial goals.

Analyzing a multifamily property requires gathering data about closing costs associated with purchasing the property. It also involves knowing the average multifamily property expenses in that neighborhood and calculating the potential income each property can offer.

After completing the said steps, you now need to calculate the return on investment using real estate metrics, such as cash on cash return and cap rate.

As you can imagine, carrying out the said calculations manually would consume a lot of time. So, is there a more efficient way to analyze multifamily real estate properties?

Mashvisor’s investment property calculator gives you access to all crucial numbers and analytics to decide whether a multifamily real estate property makes financial sense or not.

You will access the estimated rental income, as well as the relevant startup and recurring property expenses. Additionally, you will get ready calculations of the cash flow, cash on cash return, and cap rate.

The best thing about the tool is that it provides you with estimates for both long term and short term rental strategies. It allows you to carry out a side-by-side comparison and select the best real estate rental strategy for you.

How can you start using Mashvisor tools?

Simply sign up today and start your 7-day free trial.

Mashvisor’s investment property calculator provides you with the estimated rental income, as well as startup and recurring property expenses, to help you make a sound investment decision.

Key Takeaways

There are many ways of generating good returns from real estate. One of them is to invest in multifamily real estate. Multifamily real estate properties are simply properties with multiple rental units, usually numbering two to four.

The main benefit of such types of properties is that they offer a steady flow of rental income since you host multiple tenants. It’s easier to scale your real estate investment portfolio since you buy multiple units at once instead of one property at a time.

Additionally, financial services providers know such properties offer steady cash flow, so they provide financing options at favorable terms.

However, there are also a few potential downsides, such as high operational expenses, high startup costs, and more maintenance requirements.

If you’ve made up your mind to invest in multifamily properties in 2023, Mashvisor can help you choose the best location and property for your financial and investment goals.

Schedule a demo today and see how our tools can help you invest in profitable multifamily properties.