The pros of purchasing a multi-family property
Building your investment portfolio with a real estate purchase is a wise choice for those who are willing to stay with their investment over a period of time. Most experts recommend that you hold onto your property for 5 years or more to maximize its’ return. While there are few types of investment property types to consider for residential real estate, small and large multi-family units are the most common real estate investment options.
This article will focus on why you would want to consider purchasing a small, multi-family property as part of your investment portfolio.
Are multi-family properties a good investment in every market?
Multi-family property investments work well in most markets because of strong housing demand and rental income potential. It comes down to a mathematical formula – multi-unit properties allow you to capitalize on additional rental income that you wouldn’t have access to in a single-family unit. Most small multi-family dwellings include two to four units. Anything above four rental units starts to fall into the categorization of a commercial property which leads to a more complex set of rules for financing. Commercial real estate loans focus more on the experience of the buyer and the earning potential of the property making the acquisition process somewhat more difficult. Some additional reasons why a multi-family property can be a good investment in most markets include:
- Bigger cash flows
- A larger pool of tenants (less risk for the owner)
- Scalability of your real estate portfolio
Education opportunities factor in where to buy your investment property
Purchasing an investment property in a community that has educational opportunities like cities with a university are typically a good choice because of the high demand for rental housing. And, communities with college populations typically have a younger demographic, often with 75% of the residents under the age of 55 that commonly stay around after graduation to start their own business which brings in new jobs and further contributes to the health of the economy. These markets are ideal when considering where to purchase your small, multi-family property.
If you own an investment property, you have the opportunity to deduct certain costs when filing your annual income taxes. These can include:
- Mortgage Interests
- Business Expenses
Depreciation is also something you can benefit from as an investment property owner. The IRS assumes wear-and-tear on every building as time passes (depreciation of an asset). As a rental property owner, you have the opportunity to use this depreciation as an annual write off reducing your tax liability.
Living in your multi-family property
If you’re looking to bring your own housing expenses down you should consider purchasing a multi-family property and reside in part of the property and rent the other unit(s) out. This is an obvious benefit to you directly bringing down your mortgage payment and depending on the market even eliminate your payment completely by having your renters cover your mortgage payments. In this scenario you could also pay extra on the mortgage each month, allowing you to build your equity faster.
When purchased at the right time with low borrowing rates, multi-family properties can produce substantial cash flow while reducing your own mortgage while providing you with long-term tax benefits. Multi-family properties are a proven income-generating investment choice in most markets, particularly those towns with colleges or low vacant rates offering larger pools of potential tenants.