Multifamily Property Investment: What You Need To Know Before Investing

16.11.21 10:53 AM By Christian Catron

    Multifamily Property investing has become a very attractive business for investors. According to CBRE research, multifamily properties are one of the best-performing asset classes, which can be attributed to at least 3 facets of this type of investment vehicle: cash flow, capital appreciation, and tax benefits.

WHAT IS MULTIFAMILY PROPERTY INVESTMENT? 

        Multifamily real estate investment refers to acquiring and owning multiple units of residential property. Condominiums, duplexes, apartment buildings, and apartment complexes are common examples of multifamily properties. Multifamily rental housing is the fastest-growing real estate asset class in the country due to the rising demand for affordable housing.

Investing in a multifamily property has several benefits. These include stable cash flow, the ability to force appreciation, and attractive tax benefits, among others.

Let's go over each one closely. 

Stable Cash Flow

        With multiple rental units, more consistent and higher total rental income is possible. In addition, multifamily real estate investment typically involves the opportunity to upgrade the property, subsequently resulting in the ability to raise rents to the market level.  

These increased rents then lead to higher income, higher cash flow, and ultimately, a higher property value.

A property that is producing stable cash flow is an indication of its healthy financial performance.  This is because the revenue/income of the property is more than adequate to pay for operating expenses and debt service (mortgage payment).  The remaining amount is cash flow that can then be distributed to investors.

In sum, the best type of properties in this asset class are ones that have multiple units (the more, the better), provide opportunity to enhance the property via upgrades, both of which enhance the ability of a property's ability to produce stable cash flow. 

Ability to Force Appreciation (aka Capital Appreciation)

        The valuation of commercial real estate (CRE) is determined by the Net Operating Income (NOI).  An operator can increase revenue through increased rents by upgraded units and doing renovations. Moreover, you can charge for added amenities such as reserved parking, technology package fee, utility bill backs, pet fees, etc. 

Meanwhile, operating expense efficiencies/cost reduction can be achieved through improved operations by implementing a water conservation program, optimizing headcount/payroll, negotiating better rates on insurance, and protesting real estate taxes.

Said plainly, an investor/operator can force appreciation/value of the property by increasing the revenue it produces and by reducing its expenses.  After all, NOI = Revenue - Expenses.

Tax Benefits 

        Like any other business, Multifamily properties can also provide tax relief by allowing the property owners to deduct business-related expenses.  These include utilities, insurance premiums, management fees, repair and maintenance costs, and marketing expenses. 

However, the most critical aspect of tax benefits for any CRE investment is its ability to first, depreciate its assets; and second, to accelerate as much of that depreciation as possible.  In order to do this accurately and effectively, a cost-segregation study must be conducted in order to correctly classify the components of the property into its appropriate depreciable schedules.  

Working within the tax code, a property owner is able to produce maximum tax benefits for the property, which are then passed on to the partners/owners of the property. 

Avoiding the pitfalls of multifamily investing 

        While multifamily property investments entail attractive benefits, like all investments, it also comes with potential risks and challenges. 

Here are some considerations to take into account before investing in the multifamily property market: 

Finding a good investment requires both expertise and due diligence in order to mitigate risks and avoid/minimize losses.

Maintaining the property and hiring qualified staff can be challenging, time-consuming, and costly. 

Dealing with multiple tenants with various concerns can be quite taxing. To avoid these potential pitfalls and enjoy ownership without the daily hassles, consider partnering with an established real estate firm. 

Partnering with a real estate firm with solid strategies, experience, and consistent performance is a smart move. 

HOW TO CHOOSE THE BEST REAL ESTATE FIRM?

        Multifamily property investments are most lucrative when they are made in partnership with a seasoned real estate company that consistently maximizes investors' returns while carefully preserving the investment capital. The firm should be adept at identifying high-quality property with key demand drivers such as strong multifamily fundamentals, population growth, and employment growth. 

As an investor, you need to find a firm that is proficient in executing a thorough business plan and strategy. The firm should have competent and well-coordinated teams in its acquisition, asset management, property management, and construction management departments to ensure minimum risk and maximum returns for investors.


Only trust the experts.


        If you're looking for a multifamily real estate investment company that'll help lower your risk, reduce your costs, and maximize your returns, Redeem Investments is the right company for you. We're located in Texas and specialize in profitable multifamily real estate investment. Contact us today to learn more about how we can help you achieve your investment goals.

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