Multi-Family Rentals – What to know in 2020

Multi-family rentals are those buildings that are designed to be occupied by more than one family. This would include duplexes, triplexes, quadplexes and larger apartment buildings. The benefits of owning and renting out multi-family units include being able to generate bigger returns faster, easier financing, ability to afford professional management, security, tax advantages, and potential for appreciation. Let’s go a little more in depth on multi-family rentals and their advantages.

What is a multi-family rental property?

A multi-family rental property is any property that is designed to be occupied by more than one family. Many high net worth individuals consider multi-family real estate to be one of the safest and most lucrative investments you can make. It is not a get rich quick scheme and it requires that you do your homework and put the time in, but done right the benefits can be both lasting and substantial.

Benefits of a multi-family rental property:

Bigger returns faster: This is what everyone is looking for when they are considering where to invest their hard-earned money. If the returns are good for single family rentals then multi-family rentals have the potential to accelerate your returns dramatically. It stands to reason since you have more checks being deposited in your accounts. Of course, the up-front costs are usually higher as well but financing may be cheaper.

Financing: Naturally larger multi-family units are more expensive than single-family rental homes. Bigger homes cost more than smaller or single homes, it’s just common sense. But what is not so obvious is that most banks and lending companies are more willing to lend you the money to purchase a multi-family rental and at better rates because of the security involved with larger multi-family rental units.

Imagine you are lender and you have two people coming to asking for a loan. One tells you they are going to buy their neighbors home and rent out. The other is going to buy a triplex townhome across the street and rent it out. Which person is more likely to be able to make their loan payments? It’s the guy who has three checks coming in instead of just one.

For this reason, you will most likely be able to afford a larger loan and at a better interest rate when you are using the money to purchase multi-family rental units. This is especially true in 2020 since interest rates are falling and banks are being encouraged to lend out money to restart our economy in the wake of the coronavirus global pandemic.

Professional Management: Having a larger income from your multi-family rental will allow you the opportunity to employ a professional management company to look after your building and your tenants. While it does cost a little more money, it can be a huge time saver for you. With a professional management company on board you no longer have to field emergency midnight calls to fix a broken toilet. Professional management can look after the following:

• Finding tenants
• Checking tenant references including credit check
• Dealing with tenant disputes
• Finding qualified contractors to make repairs, including cleaning and painting
• Arranging for building security
• Collecting rent
• Show properties to prospective tenants

With multiple dwellings to look after it can be very demanding of your time. Your professional management team just might become your best friends.

Security: We touched on this in the financing section but having multiple sources of income is better and more secure than having just a single source. It is obviously easier to withstand one tenant moving out when you have 3 others in your building than if you have a single-family rental unit. You never want to be vacant at any time, for this means that you have no income.

“A multi-family property generally sees steady tenant demand from a diversified renter base, short-term leases with rates that can be adjusted for inflation and better market value, often with less capital required for upkeep relative to other real estate assets”.

Another source of security right now is what is known as the Millennial Effect. The largest generation in history is hitting their late 20s and early 30s. They are finished school and are looking or have found entry level jobs and have a desire to live on their own. This represents a huge source of demand for rental units (as they are more affordable than purchasing homes). The vacancy rate for rental properties is the lowest its been in years at 6.6% according to the US Census Bureau first quarter report for 2020.

Tax Advantages: There are a number of tax advantages to owning a multi-family rental unit that will allow you to increase cash flow in the short term while maximizing tax savings over time. I’m talking about depreciation versus cost segregation.

For a multi-family unit with a residential designation (4 units or less) you can depreciate the property over 27.5 years which can be deducted on your tax return to reduce the amount of tax owing. Depreciation typically includes the cost of the building and any improvements less the amount allocated to the land itself. This is all to the good, but:

With cost segregation you can improve your cash flow and maximize your tax benefits by accelerating your depreciation over a shorter period of time for certain designated areas of your property. For example, carpets or window treatments have a shorter life span than the building as a whole. Use of cost segregation allows you to depreciate different assets of the multi-family rental over a shorter time period, which can offset more of the income in the earlier years of the lifespan of the rental unit. Remember, it is always better to have more money sooner. You can take advantage of the time value of money by investing those savings sooner and for a longer period of time.

You can also deduct the cost of expenses incurred when operating your multi-family rental. This includes the cost of your professional management company and all repairs that is required to secure your income. You can also deduct the interest on your loan as well as any property tax that you pay. It is all deemed as being a cost of generating your income and is therefore deductible.

Appreciation: Over time your property will change in value due to market conditions and whether or not you have made any improvements to the real estate. While it is not guaranteed to increase in value every year – there are fluctuations – generally speaking, the value of your multi-family rental unit will be worth more the longer you hold it (and so long as you keep up with the maintenance).

While you can earn an excellent income from collecting monthly rent the largest return on your investment will most likely come when you sell the building. Location is a key factor here, just as it was when you were buying the property in the first place. So to, are any improvements that you made, changing supply and demand of rental units, changes to the local neighborhood and several other factors.

Passive Income: When you employ a professional management company to look after the details of your multi-family rental unit you are really moving into the sphere of passive income. Essentially, you can keep your day job and still earn a very nice income from your property. Depending on the numbers you can even quit your day job and sit back and relax.

Conclusion: Many high net worth individuals got that way by owing a multi-family rental and you can do it too. Because you can generate larger returns faster than with a single-family rental, the multi-family rental opportunities are very attractive. With easier financing, professional management, increased security, tax advantages and the potential for a huge windfall when you exit the market due to appreciation the benefits of multi-family rentals are excellent.