Multifamily Investing: A Comprehensive Guide – Part 3
Multifamily Investing: A Comprehensive Guide – Part 3
How Multifamily Investments Can Qualify for Unique Tax Deductions
Commercial multifamily units that contain over five units often qualify for unique tax deductions that can include:
- Maintenance
- Management
- Marketing fees
- Insurance premiums
- Repair costs
- Utility bills
Any fees associated with attracting new tenants and keeping your investment healthy, which you can then write off as marketing and maintenance costs. Investing passively in multifamily generally allows for “pass-through” tax benefits; in other words, you can leverage the same tax benefits as the sponsor. The Ascent Income Fund is structured as a REIT, offering potential tax advantages. This income-oriented fund also capitalizes on the broad demand for multifamily in the U.S., helping to provide private credit for operators across the U.S. and thereby offering attractive, diversified yield to individual investors.
They Allow for Passive Investment
If “landlording” doesn’t sound appealing, you can also invest passively in multifamily properties through online marketplaces. This allows you to enjoy the lifestyle benefits of remote ownership. Remote ownership in multifamily properties can provide steady cash flow and help you diversify your portfolio by taking advantage of far-away markets. The best part? You get these benefits without the headache of property management and maintenance.
Value-Add Acquisitions vs. Ground-Up Development
There are two main ways to invest in multifamily properties – acquiring existing assets and then adding value, or pursuing new ground-up development projects. Each method carries different levels of risk and potential returns.
- Value-Add Acquisitions: This involves purchasing an existing multifamily property, operating it, and eventually selling it. The specifics of this strategy can vary widely, ranging from simply maintaining a relatively new property to maximize cash flow, to extensively renovating and repositioning an older asset. Regardless of the approach, most acquisition strategies aim to increase the property’s net operating income during the holding period to potentially enhance its value for an eventual sale.
- Ground-Up Development: This strategy is opportunistic, focusing on constructing new multifamily projects from the ground up, and typically has long-dated projected hold periods. A common approach is to build the property, lease it up to stabilized occupancy levels, and then sell it shortly after — typically within a three-year timeframe. This is often referred to as a “merchant build” in the industry. The primary goal of ground-up developments is to maximize the potential returns and equity multiples for the investment partners.
Types of Multifamily Investment Properties
“Multifamily” is often used as shorthand for “apartment properties.” While apartments may make up the bulk of multifamily investment assets, there are other forms of multifamily, or “subasset classes.”
All types of multifamily properties benefit from the same underlying dynamics: a tangible asset with an essential use and the ability to deliver cash flow and hedge against inflation. However, various types of multifamily strategy may entail different risk/return profiles and considerations. Smaller multifamily properties like duplexes, triplexes and quadruplexes might have less maintenance costs but are generally smaller in total capitalization, and so do not have the same potential for scale and achieving total return.
The investment strategy — or type of business plan — is also a critical component of multifamily investing. A core or core-plus investment will entail less risk and less total return potential. However, core and core-plus assets typically have more stable occupancy, and so may provide more reliable cash flow. Other, more opportunistic value-add real estate investments (as well as ground-up development projects) tend to carry higher risk and thus have higher total return potential. Be sure to understand the business plan as you consider multifamily investing.
Here are a few of the property subtypes that are often grouped into the broader multifamily asset class:
Apartment Buildings
Apartment complexes are the most common type of multifamily property on the market, with nearly 22 million units across the country. Construction pipelines are expected to thin considerably, however, as the effects of higher interest rates make it more challenging for operators to finance new projects. Unlike small multifamily units, large complexes require involved property management teams and routine maintenance. Tenant turnover is typically high, however, so rent prices can quickly be adjusted to reflect current market values.
What Commercial Multifamily Investors Should Know
Apartment buildings are one of the most common types of multifamily real estate, with nearly 22 million units in the United States alone
Duplexes, Triplexes and Quadruplexes
Duplexes refer to two individual units that occupy the same building. Oftentimes a wall is shared between the two units and both rentals are identical. Triplexes and quadruplexes are built with the same configuration in mind – three or four units are all housed within one complex. Since these configurations house a small number of units, they’re potentially a good fit for newer investors. Fewer units usually mean fewer maintenance and management responsibilities, making duplexes, triplexes, and quadruplexes a great portfolio add for experienced investors as well.
Townhomes
Townhomes are popular property rentals for those who desire affordable privacy within a gateway market. Although most townhomes share a wall with other units, they’re generally more spacious and can come with amenities like garages and private yards.
The private outdoor spaces associated with townhomes have awarded them the name “garden apartment.” Townhomes can also be great properties to hold and sell for a profit, particularly for investors who aren’t keen on renting out their real estate investments.
Condo Complexes
Condos are attractive investment opportunities for those who want a low amount of maintenance responsibility. Most homeowners association (HOA) costs will take care of maintenance and management fees. This type of multifamily unit is a great investment choice for desirable markets like tourist destinations or popular cities. It’s possible to own one condo unit within the complex or invest in entire condominium complexes.
Student Housing
Student housing is such an appealing strategy that it is often considered to be its own asset class. In addition to the usual benefits of multifamily investing, student housing assets offer addition recession hedging: while a tenant base for an apartment building may fluctuate based on macroeconomic factors, demand for student housing usually does not. If anything, downturns put upward demand pressure on post-high school education, and hence on student housing.
Bottom Line
Multifamily real estate presents a promising investment opportunity. However, determining the profitability of such investments and understanding the various financing options available is vital to success in this arena. You may want to consider investing in multifamily properties for a number of reasons, including portfolio growth, the high demand for housing, the various available financing options, cost efficiencies and passive income creation. However Investments in Multifamily housing can be very tricky. Don’t venture down this road alone We live it and breath the industry. At SIMM Capital our investment strategy is to give everyone the chance to build wealth through real estate. We seek the best assets that hold the largest opportunities while delivering in rent growth year over year. We know the business. To see how we can help you with your Real Estate investments talk to an expert and click the link www.simminc.com
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