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5 reasons to invest in multi-family properties

5 reasons to invest in multi-family properties

There are many reasons to invest in multi-family properties. First of all, real estate of any kind is a hedge against inflation and it is tangible. This means that you can see and touch it, unlike stocks which are just pieces of paper. You can reinvest your returns by paying down a mortgage or using the proceeds to buy more properties. Multi-family properties bring in increased (cash flow) income and are surprisingly easy to finance. You can grow your portfolio quickly and employ a management company to ease the day to day operations.


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Let’s look at 5 reasons you should be seriously considering investing in multi-family real estate.

1. High Returns with Low Fluctuations: Take a look at the following report from CBRE the world’s largest commercial real estate investment firm. It describes how multi-family properties have the highest average return and the lowest standard deviation. This means that they have the least volatility and the best ROI.


Average annual return and standard deviation by property type

Another advantage is that as soon as you invest in a multi-family property you will begin earning income from tenants’ monthly rent. As time goes by you can increase your income by increasing the rent due as well as realize gains from the property’s appreciation.


2. Easy Financing: Currently mortgage rates are some of the lowest they have ever been. But compared to single-family homes, securing financing for multi-family homes is much easier and they have even lower rates because of the excellent income potential of multi-family real estate.

Think about it for a minute. In a single-family home if the tenant moves out you are 100% vacant. Whereas in a multi-family unit if someone moves out you still have the other tenants that are paying rent. This makes the financier much more secure in their lending.


3. Depreciation and Capital Expenditures: Holding investment real estate allows you to take advantage of the tax regulations by reducing depreciation and CapEx from the property’s income. You can also use the 1031 exchange to defer taxation on capital gains when you purchase a like kind property for investment purposes. This can really drive profits in your portfolio.


5 reasons to invest in multi-family properties | Add Value to your Purchase

4. Add Value to your Purchase: When you make repairs or upgrades to your multi-family property you are adding value. This helps to justify rent increases, which adds to your income, and boosts your property appreciation. Whether you add a new coat of paint, siding and fix the landscaping or you make more substantial improvements to kitchens and bathrooms it will all add to your overall property value.


5. Leverage: You don’t need very much money up front to be able to purchase high priced real estate. At least when compared with buying stocks. When you purchase stocks on margin you still need to put roughly 50% down. Worse still is if the value of those stocks drop you might be forced to sell to cover the margin position. However, you can get into real estate with 10% or even 5% down (and in some special cases even less). If the property value drops you can just hold it until the market rises once again.

An additional reason to purchase multi-family real estate is that there is huge pent up demand for rental properties. Millennials and even Gen Z are entering the marketplace in large numbers and are much more likely to rent than own. It is speculated that this is because of the large student debt load young people are having to carry which makes it much harder to save up for a down payment.

Since the Great Recession, the number of financially burdened young adults living at home has increased. As the economy moves toward full employment and wages increase, it's anticipated this pent-up demand could translate into over 3 million to 4 million additional renters. Meanwhile, the annual new-apartment supply averages only around 325,000 units.

At the other end of the scale older Baby Boomers are also looking to downsize and will continue to drive demand for apartments and condos.

Summary: Historically real estate has helped build more wealth than any other vehicle. Since you can purchase income producing multi-family property with easy financing, lower interest rates and taxation benefits it is easy to see how true wealth gets established.


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