Investors looking for new real estate opportunities should consider multifamily real estate. The multifamily market is performing well in the current economy, and tax rules provide favorable conditions for investing in apartments. While there are real advantages to apartment investments, they have their own unique challenges as well. Rather than face those challenges alone, investors often work with an experienced multifamily real estate investment company.
The Benefits of Multifamily Real Estate
High return on investment potential. ROI has to be balanced against risk. While there are other investments that might pay more than multifamily real estate, they will usually do so in exchange for far greater risk. Multifamily real estate is a good value for the relatively low level of risk involved compared to other forms of commercial real estate. It potentially provides both cash flow and appreciation, so investors should see some return on a regular basis, as well as the potential for a nice profit at the time of sale.
Investing in your investment can really pay off. If you have a Class B or C property, upgrades—often even simple cosmetic changes—can bring a significant, permanent increase in value. This process, known as repositioning, is very popular among investors.
Tax benefits. Landlords can deduct some mortgage interest, insurance and maintenance costs from their income. Another tax benefit is that residential property has a 27.5-year depreciation cycle, compared with 39 years for nonresidential property. Then, when the time comes to reset the depreciation clock, or when the investor needs to consolidate or divide assets or change the structure of their investment for other reasons, a 1031 exchange allows a property owner to exchange like-kind properties without tax liability. In addition, depending on what the official tax law changes are, it may be beneficial to investment property owners.
You determine the level of management complexity. Managing a multifamily property is a lot of work. Some investors prefer a hands-on approach to property care; others choose to employ a management company. Sometimes, the increased efficiency of a professional, trusted management service saves the investor money.
Multifamily Real Estate Investing Has Downsides
Competition is high. Multifamily real estate investors compete in a limited market, so finding the perfect property can be difficult. Investors need a high level of knowledge and sophistication to identify the best opportunities and carry out successful transactions. For this reason, many investors turn to real estate investment management companies. An experienced firm understands the local market and is able to negotiate for the best possible sales conditions. An investment management company can also tailor the size of an apartment investment to an investor’s needs more precisely than may be possible on the open market.
There are risks. Real estate investors live in a world full of surprises, not all of which are pleasant. Tax codes and zoning ordinances can change to a property owner’s disadvantage, as can the demographics of a neighborhood. Plus, even small problems can have a large impact on multifamily property owners. A single broken pipe, for example, could be very costly, and one difficult tenant could be a thorn in an investor’s side for a very long time. A management company can help mitigate problems by serving as a buffer.
Liquidity is limited. Investing in apartments represents a high concentration of assets. If an investor wanted to convert a property asset to cash, it could not be done immediately and it would probably become a taxable event. Properties that have been used in a 1031 exchange are also subject to the capital gains tax when they are sold. However, if a property is part of an estate, the capital gains tax is wiped out and the property is only subject to the estate tax on its current value.
Financing can be expensive. A lone investor will be limited by their access to financing. A financial institution will require a down payment of at least 20% before issuing a mortgage. The investor will then be faced with the traditional trappings of a mortgage, such as balloon payments and fees. Many investors turn to an experienced multifamily real estate investment company to avoid those conditions.
Find out more about multifamily real estate investing in our blog articles.
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