5 Reasons Why Multifamily Investment Makes Sense
Updated: Jun 22, 2022
The Demand for Multifamily Properties
The demand for rental accommodation continues to outpace supply significantly. The rental housing supply has been falling short by hundreds of thousands of units each year across the United States. According to The National Multifamily Housing Council and The National Apartment Association, this situation looks set to continue for many years to come. As such, here are five reasons why multifamily investing makes sense:
Reason #1 - Hedge Against Inflation
Due to the coming inflationary period, the dollar’s purchasing power erodes. However, because multifamily is a hard asset, it is a well-known hedge against inflation. Therefore, many
investors divert their capital into tangible assets when inflation is rising.
As inflation increases, then typically, so do rental rates. Multifamily properties do very well when inflation is on the rise. With that said, multifamily operators must also take care during periods of inflation because although rental prices are on the rise, so too are interest rates which mean higher mortgage payments which reduce a property’s pre-tax cash flow. Therefore, when a multifamily operator positions themselves to strike a delicate balance between rising interest and rental rates, the parcel will be well-positioned to do very well during inflation.
Reason #2 - Demographic Trends
Current demographic preferences reveal a trend at both ends of the age spectrum for renting
instead of owning. The younger demographic is finding it more challenging to get the financing for property ownership, and the boomer generation favor downsizing and the increased freedom that allows. The result is that the demand for rental property is rising.
The combination of market factors gives a strong positive indication for sustained revenue growth in the multifamily sector. The conditions look favorable for multifamily investment in most locations for the foreseeable future.
Reason #3 - Economy of Scale
The basic meaning of the economic term, ‘economy of scale,’ is a real cost-saving benefit of being more prominent. To quote Investopedia, an ‘economy of scale’ is an advantage “that arises with increased output of a product. Economies of scale arise because of the inverse relationship between the quantity produced and per-unit fixed costs.” How does this concept a
pply to the argument that multifamily investing is more advantageous than investing in single-family property?
For example, if you own a 60-unit property and then one tenant moves out, the 59 remaining units cover the property’s bills and pay the mortgage. Conversely, if you own a single-family property and the tenant moves out, there are no other occupied units to offset the vacant unit. You, as the owner, will have to pay 100% out of your pocket to cover bills and mortgage until a new tenant moves in and begins paying rent again.
The rationale also applies to the cost of operating properties. The cost of managing and operating ten single-family properties, which could be spread across multiple markets and miles, and the cost of hiring different contractors to care for each one could be punitive. However, the cost and the management would be more efficient and cost-effective when managing one multifamily property with 10 units under on the same property.
Reason #4 - Greater Control of Property Value
You are almost entirely at the mercy of market forces with a single-family property. Your hands will be tied if you need to sell in a down market. The value of your parcel will be determined by what other properties have sold for in the local area.
A multifamily property is pe
rceived somewhat differently because of its commercial nature. These properties function as a business, and a significant part of its value is determined in the same way. This means that the value is much more in your own hands because the value is determined by the income it produces.
Businesses are mainly valued on their profitability, and similarly, a multifamily property’s value is determined by its net operating income. Something as straightforward as adding a laundry facility or some paid parking are two examples that can very positively affect the profitability of your multifamily property and, in turn, its value.
With a multifamily property, there are many more ways that you can bring your management and entrepreneurial skills to increase the value of the property independently of the surrounding property market.
In a nutshell, you can raise the value of your multifamily property by decreasing expenses and increasing income. Opposed t
o single-family and small multifamily properties up to 4-units, which is dictated by what comparable properties have sold for.
Reason #5 - Tax Benefits
One of the great things about supplying housing for the populace is that you are helping the government fulfill one of its essential responsibilities. Not surprisingly, in return, the government offers you certain tax advantages.
One of the most significant tax advantages for multifamily property owners is something called ‘depreciation deduction,’ It can allow you to deduct a large amount of the income your property generates. For details on how it works, look at the following
article, How Rental Property Depreciation Works.
Alternatively, multifamily property tax laws benefit you in that you are permitted to use some of the cash flow from the property itself to pay down the mortgage.
It is permissible to collect revenue but show a much smaller income on your taxes. It allows you to take a portion of that rental income and use it to pay down your debt on the property, which will steadily increase the equity.
With the help of a good tax advisor, you may find many other legitimate ways to capitalize on the tax deductions and incentives, such as bonus depreciation, that creates attractive tax benefits for multifamily property owners, often producing a $0.00 tax bill.
To learn more about apartments and how your money can work harder for you by investing passively in multifamily real estate, Then Book A Call Today, and we will be happy to have an initial conversation. We are looking to build a community of like-minded forward-thinking people interested in leveraging the collective power of syndications to help us co-create financial legacies through apartment investing.