There are strong pros and cons to buying multifamily property as a first-time investor. By understanding them, you can make a more informed decision. In this article we discuss both the pros and the cons.
Multifamily can mean duplex, triplex, quadplex or a complete apartment block. Any property with more than five units is considered commercial rather than residential, so loans may be more difficult to obtain, and finding and managing a large number of tenants requires experience, skills, and abilities many first-time investors do not have. Let us begin with the investor, then move on to the property.
The First-Time Investor
As with most decisions, personal abilities, goals, and finance all play a part. Do you intend managing the property yourself? Will you be the landlord, property manager, handyman, and handler of tenant disputes? Will you live in one of the units? Do you have the finances to employ a property manager, leaving you with a passive income stream? Looking beyond the basic financial investment can help the first-time investor decide on what sort of multifamily property to buy, or to focus on single family homes.
The Pros of Multifamily Properties
- Better Cash Flow. Multifamily properties are rarely totally empty. If one tenant moves out, rent from the others keeps coming in.
- All the units and tenants are in one place. This makes managing the investment easier. There is less traveling to do to look after everything.
- Economies of Scale. Because there is one roof, one exterior wall, etc. repairs and maintenance can be less costly when calculated on a square foot basis. In a smaller property there may also only be one HVAC unit to maintain, etc.
- Finding tenants for a smaller unit is easy. Many tenants need a low-cost home, so an apartment is their obvious choice. A running supply of tenants maximizes investment return.
- You can live in one unit. As a first-time investor, it can make sense to buy a duplex or triplex, live in one unit and rent out the other(s). This gives you a place to live, while bringing in ready income to cover the mortgage, or pay other costs.
The Cons of Multifamily Properties
- More difficult to finance a 5+ apartment unit. Most lenders will expect confirmation that this is a good investment from the cash flow point of view. Can a first-time investor get and keep enough tenants, manage the complexity of commercial multifamily compared to residential multifamily or single family?
- The property is in one place. A drop in the market value or a localized storm, for example, can damage one property. Single family homes can be spread out so not all the investment suffers if something goes wrong. A first-time investor may need to show a lender that they can cope with loss of rent or a fall in equity value.
- Tenant-to-Tenant problems. Interpersonal disputes are the investor's problem to solve.
- A live-in landlord. If you occupy one unit, and there is an urgent maintenance problem, tenants are more likely to knock on your door, rather than leave a telephone or email message.
List out the pros and cons from your individual viewpoint. Discuss them with your lender then make the decision that is right for you. And please contact us to discuss your loan.