Everyone thinks real estate investing is one of the safest kinds of Investment. However, the reality is more nuanced than that. There are many layers to consider before throwing all of your hard earned money in real estate. For example, the amount of time required, capital, and return on investment is completely different between single-family units, commercial buildings and multifamily real estate investment.
New investors have a hard time deciding which kind of real estate they should invest in. More often than not, they make the mistake of investing all their money in single family properties. However, we are here to set this straight and tell you exactly why you should prioritize multifamily real estate investments.
Not to mention, is it even lucrative to invest in real estate in a world that is becoming increasingly digital? Especially, with the lockdown due to COVID-19 that shut down the entire world and moved workplaces and schools to the virtual platform. If it’s still profitable, should you invest in property? And what kind? Plus, what are the challenges beginner real estate investors have to face? These are some of the questions, we’d like to answer in this article. So, read on!
What is Multifamily Real Estate Investing?
When it comes to investing in real estate, you have two options. First, commercial properties. Second, residential buildings. Multifamily real estate refers to buildings that have multiple units and can accommodate more families or individuals than one. Typically, this includes duplexes, condos, townhouses and apartment complexes.
On the other hand, single family real estate obviously refers to houses aimed for a single family. In this way, multifamily real estate investment refers to Investment make in multifamily units only. Usually, real estate investors buy a dilapidated building at a cheaper rate, renovate and then either resell it or rent it for a profit. There are benefits to investing in both kinds of building. Nonetheless, some are more suitable for certain investors than the others.
Types of Real Estate Investment
To understand more about investing in buildings and properties, you need to know what types of Investments there are. There are two kinds of real estate investments, differentiated based upon their degree of involvement. For instance, an investor will have to work more in one and not so much in other. Let’s learn more about them.
Active Investment
In order to become an investor, you need more than just money. If you plan on doing it as a main job, then active real estate investment is for you. In this, you need to form a Limited Liability Company (LLC) first. Then, hunt for an appropriate property you want to buy and come up with a plan to finance it. Your job doesn’t end even after you’ve bought the building. Instead, you now have to manage it, which includes findings tenets, collecting rents and running the entire place.
Passive Investment
On the contrary, passive real estate investment requires you to only have a lot of money. You don’t have to do any of the work. All the steps listed above still take place but through an investment firm or a real estate agent this time. The biggest advantage of passive multifamily investments is that you employ the experts. You benefit from their years of knowledge and experience in the field. Moreover, they have better resources to speed up the process. All of this leads to you getting a better property in your name and managing it well.
What is the Scope of Investing in Real Estate after the COVID-19 pandemic?
It comes as no surprise that COVID-19 pandemic impacted the real estate market significantly. According to a report, unemployment rate rose to 14.8%- The highest rate observed since data collection began in 1948, more and more people became unable to pay their rent. Consequently, they could not afford housing anymore. On the other hand, the demand for bigger and more spacious houses increases due to the shift to online work and school. For almost everyone, their houses became their offices, classrooms, and recreational spaces as well. This in turn, increased the demand.
However, since most people wanted but could not afford better homes, the prices continued to drop. The real estate market saw a drastic decrease in the buying and selling of housing. This leads most people to believe that US Real Estate Bubble is about to burst. Wrong. This couldn’t be farther from the truth. In any time and condition, there is always a need for shelter. That’s why, real estate investment is still lucrative. Investors just need to make a better choice while investing in properties. Specifically, they need to cater to the above mentioned needs of people, to create spaces that people can comfortably live in even when everything has shifted online.
Should you make a Multifamily Real Estate Investment? Weighing the Pros and Cons
Since we’ve concluded that real estate investing is still profitable, here are some good and bad things about multifamily real estate investment that you should consider next as an investor.
Pros
Greater Return on Investment (ROI)
As compared to single family properties, Multifamily units provide a greater return on investment. This is because at any given point, the vacancy rate won’t ever be 100%. Suppose, you own an apartment complex consisting of 10 units. Even if two of them are vacant, you’ll still get 80% of the rent. Contrarily, if your single family home is vacant, your income will immediately fall to zero. Therefore, the more units you have, the better will be the cash flow.
Easy Way to Grow your Investment Portfolio
One big reason new investors are attracted to Multifamily Real Estate Investment is the ease and convenience it affords. Undoubtedly, it is an effortless way to increase your portfolio. Consider this, you can easily manage all 10 of your units since they are in the same building. Not to mention that all the hassle of looking for a building, financing, purchasing, renovating it, etc. will also happen only ones. In comparison, if you became a single family real estate investor, you’ll have to repeat all this 10 times to earn the same amount of profit!
Earn Passive Income through Property Managers
Ask anyone, “what’s the a good way to earn a passive income?” They’ll answer, “become a landlord.” Real estate investing is an excellent way to earn money passively. Not only can you hire a real estate investment trust to set up a building under your name, you can also employ property managers to do the subsequent tasks as well. Essentially, they’ll do all the work of a landlord such as finding and screening tenets, finalizing contracts, collecting rent, building inspection, repairs and upkeep of the property as well as evicting the residents. Most multifamily real estate investors are also high net worth individuals who can afford to pay property managers.
Tax Benefits
Professional real estate investors get tax benefits upon dealing in properties. They can write off maintenance cost of their properties as a business expenses. This can include the utility bills, fees for the Investment firm or property managers as well as any repair cost.
Cons
More Expensive than Single Unit Real Estate Investment
Understandably, buying a single unit property would cost less than purchasing a Multifamily apartment complex. Where you can get a single home in about $30,000, an apartment complex would cost you millions. As a rule of thumb, you need a minimum of 20% down payment for making a Multifamily Real estate investment.
The good news is that it is usually easy to get bank loans for a multi unit property. This is due to the low vacancy rate I explained earlier. The bank is guaranteed to get some cash back regularly because you always have some tenants occupying the building.
Difficult for New and Amateur Investors to Get Into
Unfortunately, investing in Multifamily real estate is largely available to rich individuals only. Since new and amateur investors do not have the kind of capital or a trustworthy portfolio, they cannot get the bank to finance their purchase. That’s why, it becomes increasingly difficult to buy an apartment complex.
Similarly, they don’t have the industry special knowledge or experience to compete with the other professionals who’ve been doing this for years. Therefore, it is advisable for beginner real estate investors to start with single family buildings and move their way up.
Real Estate Investment Trends to Look Out for in 2022
Here are some real estate market prediction trends for 2022 that investors should look out for!
Increase in E-trading
with the lockdown and shift to virtual world, expect more and more real estate trading to be done through online mediums as well.
Virtual Home Tours
Since there might be a restriction on physical travel, potential buyers as well as tenants would appreciate virtual tours of the house or apartment unit before buying. Those who employ this technique are likely to see a surge in sales as compared to those who don’t.
Properties Insured Against Natural Disasters
Coronavirus pandemic is but one of the many disasters that humans will face in the future. This is because of climate change and global warming. Especially, renters and buyers expect their properties to be insured against all kinds of natural disasters. For instance, if you think California is the best state to live in America and invest in property, then you must get your real estate insured against fires!
If you want to become a successful real estate entrepreneur, keeping an eye on these trends will help you identify the best investment options and make the most of them.
Conclusion
To sum it all up, real estate investing is still advantageous, even in a post pandemic world. However, some changes and adjustments are required to ensure maximum profit. Multifamily real estate investment is more profitable than single family unit investment if you have the initial capital. For new investors just testing the waters, single-family units are the best option to invest in. They are considerably cheaper and low maintenance.
