Multi-family Property Ownership
A multi-family property is any residential building that houses multiple families or has multiple units. It can be a duplex (2 units), triplex (3 units), quadruplex (4 units), all the way up to high-rise apartment buildings with several units or large apartment complexes. Small multifamily property ownership can be a good option for first-time investors or those with limited real estate experience.
For example, in Ontario (Canada), a two- to four-unit multifamily property is considered “residential real estate” for financing purposes – much like a single-family home. Hence, these types of property attract less stringent financing requirements (lower interest rates and less downpayment) compared to property considered “commercial real estate” (properties with 5+ units). Therefore, an investor in Ontario who is just starting out in real estate, or who has limited real estate experience, and who wants to diversify investment risk can take advantage of a two- to four-unit multifamily property investment.
Given the relatively more favourable financing requirements, it might be easier for the investor to finance the acquisition. At the same time, the multiple units provide built-in diversification by lowering the risk of vacancy or delinquency. Although not impossible, it is less likely that all tenants would be delinquent on their rent payment at the same time, and less likely too that all units in the property would be vacant at the same time. This quality of multifamily property provides some degree of comfort or assurance that the property owner can see steady cash inflows and can likely meet one’s debt obligations.
Pros of Multifamily Property Ownership
Here are some benefits of multifamily property ownership.
- Regular cash flow: A multifamily property can generate steady cash flow from multiple rents. Due to multiple tenants paying rent, you can see consistent cash inflows even when one unit becomes temporarily vacant. This Makes multifamily properties stable investments for passive rental income.
- Reliable rental income: Rents from a multifamily property can be more predictable due to multiple tenants paying rent. For example, if you have a fully occupied four-unit property and one tenant suddenly moves out, your rental income only drops 25 percent until you turn over the vacant unit. This increased rental income potential significantly improves your return on investment.
- Diversification: Multifamily properties provide built-in diversification against vacancies – making it less likely that your property will become vacant. Even if there’s a vacancy in one unit, you’ll still likely have occupancy in the other units.
- Portfolio growth: Multifamily properties offer a faster way to grow your portfolio compared to single-family properties. With multifamily rentals, you can expand your real estate portfolio faster than with single-family rentals (which you’d need to acquire one property at a time).
- Easier financing: Multifamily properties can be easier to finance than single-family homes. The steady and more predictable cash flows of multifamily rentals make them less risky investments compared to single-family rentals – from lenders’ perspective, leading to more favourable financing terms for multifamily properties.
- Tax benefits: Multifamily property investment offers several tax benefits. For example, you can deduct property expenses such as maintenance and repair costs, operation costs, marketing costs, property management fees, insurance premiums, mortgage interest, and depreciation. These deductions help to lower taxable income, significantly improving the overall profitability of your investment.
- Economies of scale: Multi-unit properties offer scale economies resulting in cost savings. Spreading maintenance and management expenses over multiple units decreases the cost per unit.
- Management: Compared to managing multiple single-family homes, a multifamily property is easier to manage. You can manage multiple units in one location more efficiently than managing individual properties.
- Lower property management costs: Property management fees for a multifamily property can be relatively less costly due to economies of scale from serving multiple tenants and rental units under one roof. Managing a multifamily property is easier than managing multiple single-family homes at different locations.
Despite the several benefits of multifamily property investment, there are some downsides. Here are some cons of multifamily property investment.
- High upfront cost: Investment in multifamily properties involves higher upfront cost (larger downpayment) compared to that of single-family homes – because multifamily properties generally are relatively more expensive. This higher upfront cost of multifamily property investment can be prohibitive for many first-time investors.
- Competition: Multifamily properties tend to attract interest from experienced investors, especially in a good rental market. When these well-endowed investors (developers, property management companies, and real estate investment companies) compete over the same properties, they bid the prices up even higher. Some deep-pocket investors sometimes even pay cash for acquisitions. Effectively squeezing out the less endowed investors from the market or making it hard for newcomers to break into the market.
- Management intensity: Although managing a multi-unit property is generally easier than managing several single-family homes, management of a multifamily property still can be intensive. Managing multiple tenants and rental units is a huge responsibility demanding a great deal of time and attention plus increased administrative, operational, and maintenance tasks. While property management can be outsourced, it comes at a high cost (in terms of fees). However, if you’re a first-time investor, or you have limited real estate experience, or you simply don’t have the time or expertise to take on landlord responsibilities, hiring a property management company to handle the day-to-day operations of your multifamily property is recommended.
- Regulatory and compliance issues: Multi-unit properties are subject to stricter regulations and compliance requirements. Investors must comply with the building codes of Ontario, fire safety, and tenant laws.