5 Pros & Cons Of Buying Multi-Unit Investment Properties
Some of us dream of passive income from investment properties. But is it all good?
Many real estate investment gurus tout the advantages of accruing a multi-unit investment property portfolio. It sounds wonderful—own a 20-unit building, here, a 10-unit there. You can just see those rent checks rolling in. That said, multi-unit investing is not for everyone and there are some distinct advantages and disadvantages. We at Agorafy took a look at five of ‘em.
1. Massive Tax Advantages
A competent accountant will be able to tell you about the advantages of owning a multi-unit building from a depreciation and tax point of view. There’s a reason why Donald Trump doesn’t want you to see his tax returns—because real estate is one of the best ways in the US to write off income and reduce your tax bill. The more units you have, the more expenses and the more deductions you can make.
2. One Location
If you own one 12-unit apartment building as opposed to 12 single-family houses all over town, your property manager only has to go to one place. There is only one roof, only one building to landscape. Only one building to wait for inspectors to visit.
3. The Appreciation Is Greater
The value of a multi-unit building is generally determined by the rental income it generates. If you buy a building that needs a work and gradually renovate the apartments you can also gradually increase the rent. At this point the property is worth a lot more than you bought it for. Then you can leverage the equity to refinance the building—or buy more.
4. Easier To Find Property Managers
Most property managers aren’t too keen on managing single family houses. There’s just not enough money in it for them. If they are charging 10 percent of the gross rents as a management fee, handling a multi-unit building makes a lot more sense.
5. The Vacancies Won’t Hurt You As Much
If you have one or two vacancies in a 10-unit building, assuming you purchased it at the right price, the remainder of the rents will cover your mortgage and expenses and should still make you some money. In a single family building 1 nonpaying tenant will erode 100 percent of your income.
1. One Roof, Many Complaints
One of the advantages of a multi-unit building could also be a disadvantage. Many investors see the fact that there is only one roof and possibly one furnace to fix as a definite plus. However, what you also have to remember is that when that one roof leaks or the furnace goes out, it could potentially affect the whole building. Now you have many disgruntled tenants instead of one.
2. Mo Tenants, Mo Problems
Biggie Smallz had it right when he said “Mo Money, Mo Problems”. In this case the Mo Money equates to Mo Tenants. When one neighbor doesn’t get on with another neighbor and they start yelling in the hallway, you or your manager are the ones who will get the call. Similarly, when one tenants’ toilet is leaking into another’s apartment or a dog is barking or music too loud, all these issues become your issues.
3. You Have To be Comfortable With Debt
Most people got into real estate because they wanted less debt—not more. Generally, people don’t buy multi-unit buildings all cash. They leverage their money and take out a loan. That means a monthly mortgage payment and when the tenants aren’t paying or have moved out, you still have to keep on paying. That can turn into a whole lot of stress.
4. Tenants Talk To Each Other
If, for whatever reason a group of tenants don’t like you, they can all decide to skip town on you together or file complaints against you as a group. Tenants have strength in numbers and when you, the landlord, are the victim of tenant solidarity, it can be more trouble than it’s worth.
5. Turn Over
Multi units have a higher tenant turnover rates than single family homes, especially if the single family comes with a garage and is in a good school district. Tenants in such a single family will take more pride in renting the house and will not want to disrupt the family by moving. In a multi-unit building, especially in a one or two bedroom apt, children may not be in the picture and leases will be discarded like trash. Tenants may move out at the drop of a hat often breaking their lease. When that happens, as a landlord, you will be responsible for spending money and rehabbing the apartment in order to get it rented for the next tenant.
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