What comes to your mind when you hear about investing in a multi-family property?
Quite a few people believe that multi-family property investments only entail procuring a property with multiple dwelling units and then proceeding to rent out the houses. While this is certainly true, it is definitely not the ONLY way you can invest in multi-family real estate. There are at least three different ways in which you can invest in a multi-family real estate business. This article will focus on these three strategies, pointing out their dynamics, highlights, and lowlights.
Well, this is the most prominent and commonly known ways of investing in multi-family real estate. You may opt to buy a duplex, triplex, four-plex, or a larger property with many units. After procuring them, you can consider incorporating some renovations to add some flair to the property then proceed to rent them out. This form of investment sounds easy, but in the real sense, it requires an investor to be very hands-on. Your commitment is needed, particularly when you go about hunting for the perfect property(especially one strategically located).
If you are considering this option, you must be aware of the income inconsistencies that come with it. One, the rate of vacancy will impact your income at the end of the month. Two, property taxes are subject to fluctuations, which will also significantly affect your monthly income. You must also note that this multi-family investment option tends to be a bit tough to sell quite quickly. This option also requires having a massive initial capital, which can be a bummer to some potential investors. On the upside, this option is an excellent way of generating income, fast, especially with a 100%vacancy. It is a unique way of creating wealth quickly and sampling out some of the members of the world’s billionaires whose portfolio includes multi-family property, for example, Donald Bren’s real-time net worth of $17 billion confirms this fact.
Real estate investment trusts REITs are also referred to as multi-family REITs. REITs allow investors to pool resources together and invest in residential property. The best part about this option of multi-family investment is the investor does not have to be the landlord, which takes a significant burden off their shoulders. A majority of the REITs are traded publicly in the stock market, meaning they can be bought off the internet, with the touch of a button. Interesting, right? As an investor in this deal, you will get your income, which is paid in the form of dividends(obtained from the REIT company’s taxable income). The advantage of this kind form of multi-property is it presents an excellent opportunity for successful passive investment. Reduced commitment is required from you (as far as time and capital are concerned). Your share of capital will be working for you, as well as the REIT company you choose to work with, and at the end of it all, you get your pay in the form of dividends. While the thought of engaging in passive investment and the returns obtained can be enticing, residential REITS come with their risks too. This form of investment is subject to interest risk. Rising interest risks would negatively influence the REIT’s stock prices. A negative influence on stock prices is not desirable for the business. There is also financing risk in this investment, evidenced by a scenario where a REIT borrows more and thus has higher debt levels. Higher debt means the REIT will have to pay its interest rates at the expense of the dividends, among other things. Further, the investment is subject to oversupply risk, especially where the supply exceeds demand. Oversupply of the residential units would mean the occupancy rate plummets, explainable by the fact that no renters are entering the market. The influence of this would be evidenced in the share dividends at the end of a financial period.
Crowdfunding is a new form of investment that was introduced to real estate. Crowdfunding allows small investors to pool their resources (money) and invest in a larger property, which they would otherwise not be able to because of financial limitations. A crowdfunding platform is tasked with managing the investment. Crowdfunding is imperative for multi-family property owners because of the enhanced access to investment capital, which means the presence of competitive financing. This kind of multi-family investment presents an excellent avenue for getting steady returns, which is enticing. Crowdfundedmulti-family property has less risk involved, considering it is a debt investment because the owner of the property pretty much secured the related mortgage loan. Should any issues emerge that would make the owner fail to repay the loan, a foreclosure action can be used to recover any losses experienced. The short hold time is also advantageous in this investment deal. The above benefits confirm how lucrative it can be participating in residential REITs. To start, you might want to look at some of the best crowdfunding platforms available for you. Some notable examples you can consider are RealtyMogul, iFunding, RealtyShares, and Patch of the land. On the flip side, you should, however, be aware there are downsides associated with this investment deal and they include the possibility of having limited returns, which tend to depend on the interest on the owner’s mortgage loan, and high fees charged by the crowdfunding platform. As you ponder over how you could invest in multi-family real estate, and by drawing from the insight provided in this article, you should note that the best investment option depends on a myriad of factors, which include the following:
In closing, it is worth acknowledging the vast nature of multi-family investments, which bring to light the numerous investment options available to you as an investor. The action you will choose to take will depend on how much the mentioned points make sense to you.