Many financial advisors believe that investing in real estate can be a great way to diversify your portfolio. If you are looking to generate a positive monthly cash flow, buying a multi-family residence might be a good choice for you for several reasons.
Easier to Finance
Even though it seems counterintuitive, a larger loan for a multi-family property may be easier to secure than the same size loan (or even a smaller) for a single-family home. This is because multi-family properties usually generate cash flow every month—even if there are vacancies in the building. For example, if you have a building with four units and one is vacant, it is still 75% occupied and you have some cash flow. If you rent a single-family home and the tenant moves out, it is 100% vacant and does not bring in any cash. Banks see it as a less likely candidate for foreclosure. If units are rented at the time of purchase, they may also be considered as income for the loan, depending on the lender.
Can Cut Down Your Own Living Expenses
Another option, which is especially lucrative for new investors with less capital, is to buy a multi-family property and to live in one of the units. The rental units can cover most (if not all) of the owner’s living expenses plus build equity in the property itself. Then, down the line, the owner may decide to move out and rent the whole building for an additional source of income or sell it and use the cash to invest in another property. Living in the building may also provide some financial incentives besides lower expenses. For example, the buyer may be able to obtain an FHA mortgage with lower rates and less money down than another mortgage because it is considered their primary residence, even if it is in a multi-unit building. Additionally, at the time of sale, the owner may also be exempt from capital gains taxes if it is their primary residence or has been for a specified amount of time.
Can Compound Returns More Quickly
Multi-unit properties can be an attractive option for an investment portfolio because they can bring in returns quickly with little added monthly expenses after the initial down payment and other closing fees. They are also good choices for investors who wish to build a large portfolio of rental units. Buying a ten-unit building versus ten separate single-family homes is faster and many times more cost-effective. Buying the ten homes would require ten inspections, ten closings, and, sometimes, ten different loans. The biggest caveat is that many investors are not interested in the added work of maintaining a multi-family residence. So, they often hire property management companies to handle the day-to-day operations, such as collecting rents, finding tenants, and handling evictions, so they don’t have to worry about these tasks. These management companies typically charge a percentage of the monthly income and investors find it quite worth the extra charge, especially if they budget for it before purchasing the property.