Discover several advantages and disadvantages to owning multifamily property and how to ultimately present the property to lenders to get the best financing package.
First-time real estate investors often invest in multifamily property when they start real estate investing. Perhaps it's because they have themselves rented an apartment and therefore feel somewhat familiar with it. In any case, apartment ownership is a stalwart of real estate investing and a valid option to real estate investors.
Multifamily property is any rental property that has more than one family unit. The smallest would be a duplex (two units), while larger rental complexes could easily consist of hundreds of apartments. In other words, there's no upper limit to the amount of units.
Not unlike any real estate investment, however, multifamily housing offers real estate investors both, advantages and disadvantages of ownership. Pros and cons. Things that make real estate investors glad about apartment ownership, and other things that perhaps cause investors to bemoan the day that they became a landlord.
We'll consider a few of those advantages and disadvantages in this article, plus we'll discuss the best way to obtain a good financing package on rental income property.
Advantages of Ownership
Foremost, with multifamily property ownership, the investor will grow wealthy in the long run simply by holding onto the property and letting the renters pay off the mortgage. Even when the property doesn't generate an immediate cash flow, the owner virtually gets to use other people's money to pay the owner's debt each time a rent check is collected.
Secondly, multifamily properties serve a basic need, which limits the downside risk. People have to live somewhere, and for any number of reasons, in any community there are always people ready to rent. Moreover, when there's a shortage of apartments, property owners can be more selective about the type of tenant they rent to, vacancy factors approach zero, and rents generally increase.
Disadvantages of Ownership
Unfortunately, apartments can be very management intensive because they surround tenant issues. It's never fun having to resolve tenant conflicts, or having to evict a deadbeat tenant.
Also, because all rental apartments thrive or die due to other people's money, when a rental market shifts to the point where there is a shortage of tenants, then owners can no longer be as selective about tenants, might experience higher vacancy, and might have to reduce rents. For this reason, because they depend on renters to meet their debt service and other obligations to keep the property, real estate investors must prepare to flex with the market conditions regularly.
How to Finance
Since income-producing properties have the advantage of being able to support debt from the income they produce, rental property gives the investor an edge in the ultimate financing of the investment.
However, real estate investors should understand how lenders view rental income property in order to get the best financing possible. That unlike the situation with vacant land and single-family home financing in which the investor's financial strength is the most important element lenders consider, all income properties are viewed from the point of view of the property first and the investor second. That is, the lender doesn't simply consider the borrower's financial strength, but will heavily evaluate the property based on the property's income stream as well.
In this case, it's crucial, therefore, that you represent the multifamily property to the lender with accurate income and expense data and fair projections that might reveal a better end-result. The good news is that there is real estate investment software available that can create these cash flow presentations for you.
Yes, multifamily property ownership can be extremely profitable yet at the same time, a gigantic migraine. But as a friend of mine once said, "Life is a series of trade offs." So the question really is, how much are you willing to endure to make money? Your answer will shape your real estate investing strategy, and ultimately determine whether apartments are a good investment for you. Here's to your success.
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