Top 6 Reasons to Invest in Multifamily

Smart investors looking for a good investment opportunity in real estate turn to multifamily buildings for an attractive return. For many, the main advantage that comes to mind is a steady income stream but there are many other benefits to multifamily ownership as well. With a rental property, you are likely to hand off the day to day management to a professional property manager so you can become a passive investor.

Here are some of the top reasons to invest in multifamily properties:

#1 – Passive Income

After you make your initial investment to make the purchase and fix up the property, you will enjoy a passive income stream from tenants. Income producing rentals are typically secured by leases of up to 12 months. As a passive investor, you can rely on a property manager for marketing, rent collection, maintenance and repairs to enjoy monthly income without hands-on involvement.

#2 – Tax Advantages

Depreciation is a widely recognized tax benefit to owning real estate, and you can take advantage of additional tax laws to save you money. The 1031 Exchange allows you to postpone paying capital gains taxes when you sell and invest the profits of the sale in a similar property. The new property must be of equal or greater value. You can deduct some mortgage interest payments, but check with your attorney since laws have changed.

#3 – Leverage

Leverage is debt financing on your property and allows you to purchase more assets with less money. When you invest in commercial real estate, your debt on the property may be many times the amount of the original equity. An investor with $100,000 to invest can use leverage to purchase a multifamily property for $200,000 or even $400,000 to benefit from increased appreciation potential and cash flow from higher rents or more rental units.

#4 –Equity Building

Reducing your debt increases the equity in your property. Smart investors use low cost debt to increase cash flow when they borrow at a lower cost than the income the property generates. So if the building generates a 6% return and the debt on the property is just 4%, investors enjoy a 2% positive leverage. In many cases, the debt on the property can be reduced by the Net Operating Income (NOI), the gross income minus expenses before debt.

#5 – A Hedge against Inflation

Long-term trends demonstrate that as inflation rises the price of multifamily properties rise along with it. Real estate has a high correlation to inflation when compared to other assets such as corporate bonds, the S&P 500 and 10 year treasury notes, making rental apartments a good investment as a hedge against inflation.

#6 – Appreciation Potential

Income producing multifamily properties are hard assets with real value in the land, the building and the income possibilities. Historically, multifamily buildings have appreciated in value as increases in rent and effective management positively impact the NOI of the property.

Summary for Investing in Multifamily

Real estate investors who invest in multifamily properties take pride in ownership and benefit from the advantages of passive investment. Tax advantages and appreciation can help you build wealth while maintaining an effective hedge against inflation. Low-cost debt can reduce your expenses and increase the equity in your properties in the long run, you will enjoy a hedge against inflation and realize the appreciation of hard assets like the building and the land it sits on.