Most people pursue real estate investment opportunities because of the economic returns they can bring, not because they enjoy receiving middle-of-the-night tenant calls.
But whether you own one property or 100, you know that each unit’s ROI potential can be impacted by a host of factors, including the expenses required of that particular unit, the type of tenants who reside in the unit, how well it is managed, among others.
While investing in real estate can be profitable, there are pros and cons that need to be evaluated with every opportunity. In this post, we will discuss multifamily units and the potential (and challenges) they can offer to owners. In Part 2, we discuss the advantages and disadvantages of managing small multifamily properties.
Multifamily Units Defined
Rental properties are generally classified as being one of the following:
- Single family,
- Small multifamily or
- Large multifamily
Small multifamily properties consisting of 2-4 units per property are referred to as residential multifamily properties, whereas those with 5 or more units are referred to as commercial multifamily properties.
Large multifamily properties are those consisting of 100 or more units and require a different type of management approach altogether, including having a team onsite.
Advantages of Owning Small Multifamily Properties
Compared to owning a single-family rental property, small multifamily investments offer several advantages, including:
- Lower transaction cost per unit
- Less capital expenditure per square foot
- Less competition to purchase (potentially)
- It can be easier to secure financing opportunities for properties with 5 or more units.
- Value is based on capitalization rate, or cap rate, which is calculated by taking the net operating income divided by the current market value or purchase price (this is generally an advantage, though it could also be a disadvantage depending on the unit).
Additionally small multifamily properties may require a more sophisticated level of property management, which can be advantageous because it could give residents and owners the high level of service and attention they expect from a premium product.
Disadvantages of Owning Small Multifamily Properties
On the flip side, investing in smaller rental units comes with risk. One is that the investment risk is concentrated. If that property doesn’t yield a return, you could be in a tough spot. Here are a few other disadvantages of owning a small multifamily property:
- You’ll need to dedicate time and resources to property management – whether you do it yourself or hire someone else to do it, more rental units will mean more work.
- It may be difficult to source 5+ unit properties.
- You may encounter utility submetering headaches.
- You will face expenses that come with maintaining the common areas; keeping up with landscaping and snow removal; and ensuring elevators, sprinklers, secured access and commercial HVAC systems are functioning safely. Maintenance is far and away the most expensive category of spending for property owners.
Investing in small multifamily properties can be a good way to grow your real estate portfolio, and we believe the advantages outweigh the disadvantages in many instances. In Part 2 of this blog series, we’ll discuss the advantages and disadvantages of managing small multifamily units.
To learn more about the multifamily real estate market in Columbus or to ask your questions about property management, contact us at RL Property Management today.