Why Invest In Multifamily Property?
By Paul Esajian on July 5, 2019
One of the most common roadblocks for new investors is figuring out where to get started. They pursue a handful of potential niches and strategies but find faults in almost all of them. If you are looking for a path that is more secure than you think and offers an easy point of entry a multifamily property may be for you.
On the surface multifamily properties are seemingly far too risky to take on as your initial investment. The reality is that there are plenty of layers of protection that you might not have considered. Additionally, there is a key financing option that can help get the ball rolling and into the property within 45 days. If you are looking for a great place to start don’t be afraid to pursue a multifamily purchase. Here are five reasons why this strategy is more attainable than you may think.
- FHA Option: If you do not currently own a property you should consider taking advantage of an FHA loan. An FHA loan is simply a loan program backed by the government. They offer specific guidelines with reduced credit scores, higher allowable debt to income and lower down payments. The key with an FHA loan for a first-time buyer is the ability to put just 3.5% down on any property one to four units. Instead of having to scrape together 20 or even 25% for a rental property you can get in with just a minimal down payment. Another key factor is that the down payment can be in the form of a gift. If you have an eligible family member (mother, father, sibling, etc.) that would like to contribute there are no additional hoops to jump through. The bottom line is that there is no better financing option for a first-time homebuyer looking to establish a portfolio.
- Attractive Rates: There is a big difference in the financing for your first home using an FHA loan and your fifth rental property. With the FHA loan you can put down 3.5% and get an interest rate somewhere around 4.0%. On your fifth rental you will put down 25% and have rates just under 6.0%. Sure, your payment will be lower based on the additional down payment, but if you are comparing apples to apples the reduced interest rate has a significant impact on your monthly payment. The lower the interest rate the more cash flow available on the property. This may not be a huge consideration when you live in the property but is immense if you decide to move out. The property becomes instantly attractive and you will have residual capital from multiple units. This can serve as your springboard to other investments or simply just a nice chunk of change every month. Interest rates on FHA loans have continued to stay low over the last five years but can change at any time.
- Vacancy Protection: One of the most common fears from prospective rental property owners is facing a vacancy. Dealing with an eviction and having to scramble to cover the mortgage can completely change your financial portfolio almost overnight. The benefit of a multifamily property is that you do not have all your eggs in one basket. With a single-family rental, you have just one rent coming in. If they stop paying you are left without much of a safety net. However, with a multifamily property you still have the additional rents as some measure of protection. This is a real benefit that cannot be overstated. The extra unit, or units, can help mitigate the lost rent from one unit and save your credit. Dealing with extra units requires just a minimum amount of extra effort considering that they are located all in the same location. You don’t have to drive to two different properties if you own a two-family property. The protection afforded from extra units should serve as some piece of mind.
- Self-management Option: There is no question that managing a rental property can be a headache at times. However, these times are the exception rather than the norm. With a two-family rental where you live in one unit and rent the other is a catch-22. Your tenants are obviously in close proximity to you, but you also don’t have to travel too far to assess the situation. When you move out and you have two units to manage this gets only slightly more difficult. As we stated, you are still only managing one property. Sure, there are multiple tenants but just one roof, one lawn to cut, one driveway to shovel and one basement to divide. With a good rolodex of handy people to call managing the property doesn’t have to be an overwhelming task or something you pay a property manager for
- Appreciation Potential: The rule of thumb in real estate is to never buy assuming appreciation. Any investor who has around during the mortgage crisis certainly can attest to this. However, multifamily properties also offer tremendous appreciation potential. There are many ways you can add value to your rental property with nothing more than sweat equity. Simple updates and improvements can enhance the value instantly. With the equity gained you can use that for another property and go from there.
Don’t be afraid to dip your toe in the multifamily waters. The positives definitely outweigh any negatives and process of getting started is often much easier than you may think.