What are the risks involved in investing in multi-family properties?
Multi-families are a good investment but not for everyone. There are reasons multi-families make good investments. Like all real estate, over time a multi-family property will appreciate in value. After the debt is paid off there is good cash flow. The loan amortizes over time and in effect the tenants pay the mortgage and in some cases the depreciation taken can reduce overall taxes paid.
In a previous Sound-off column, I reviewed the benefits that come from economies of scale in regards to time, management and maintenance. In this column, I will review risk profiles, down payments and cash reserves.
Lowering your risk profile is another significant benefit with a multifamily home. With a single-family rental unit, it is either occupied or it is not. That means, if you have a mortgage, you will need to cover the cost of the mortgage (and other expenses) without a rent payment coming in to offset the expense. With multi-families, there are more tenants to cover your mortgage and other expenses. If you own a 12-plex and 3 tenants have moved out, there are still 9 paying tenants. This provides protection for the investor.
Down Payment and Cash Reserves
Multi-family properties generally have a much higher price tag than a single-family home. It is not uncommon to expect to put down 20-25 percent on the property. The payment is also larger because you are not living in the property as is seen as more risk. Additionally, you must be prepared with cash backing or cash reserves. In most situations the conditions just mentioned apply, but this is not always the case. There are other great opportunities in the area of creative financing that could require very little or no money out of pocket. Those are hard to find, requires you to think outside the box, and they may not be suitable for everyone.
Frank D’Ostilio, Real Living Wareck D’Ostilio, (203) 641-7072, email@example.com