| First lets look at the advantages to buying a multi | | | | rental. When mortgage rates were very low, the |
| unit property | | | | monthly mortgage was often less or equal to a |
| Cost per Unit: multi family housing is generally | | | | rental. That made home buying very attractive but |
| cheaper. The cost of a duplex is less than the cost | | | | the opposite is true today. |
| of two homes. Less debt and therefore less risk also | | | | 2. Mortgage money may be easier to get for a well |
| means you have the potential to own more of your | | | | priced apartment building, because its an investment |
| property than the bank. | | | | and more transparent than buying a single family |
| Vacancy Rate | | | | home because the cash flow is a good measure of |
| By definition, a multi family property is never 100% | | | | the true value of a property. |
| vacant, meaning there are always some renters | | | | 1031 Tax Advantages |
| helping to pay expenses. What happens if you lose | | | | Rental houses or business property (but not your |
| your tenant in your single family house? You lose all | | | | personal residence) can be swapped, tax-deferred |
| of your income and you have to pay the mortgage | | | | for other investment real estate. IRS Section 1031 |
| out of your savings. If you lose a tenant in a three | | | | makes it possible to exchange and even trade up |
| family house, you've only lost one third of your | | | | from a small rental property into a larger investment |
| income. The other two units will help cover your | | | | property investment property worth far more, with |
| mortgage until you rent the vacancy. One reason | | | | little or no erosion of capital gains because its possible |
| why owning small apartment houses is smarter that | | | | to avoid the capital gains tax. The Government will |
| owning single family homes. | | | | effectively let you use the tax owed to them |
| Easier to Finance | | | | towards a greater down. Now 1031 exchanges are |
| Get financing more easily. Money for commercial units | | | | complicated and you should always have a qualified |
| was available even during the recent mortgage | | | | advisor before attempting one of these. |
| freeze. For a few weeks in late August to Early of | | | | Disadvantages |
| 2007. I think that this is due to less risk, because | | | | Time Consuming: Multi family ownership is a job. It |
| multi family is less expensive per unit and because | | | | needs management skills such as dealing with people, |
| there are always some tenants helping to cover | | | | tenant screening and all the necessary business skills |
| costs. | | | | and legal issues make it difficult. You need to assess |
| Financing is more available for multi family because | | | | your own skills and see if you have the desire to |
| investment property can be analyzed using financial | | | | manage people and property. It can be very time |
| ratios like cash flow or cap rates. Lenders love to be | | | | consuming. A larger property, say 10 units or more |
| able to assess the investment value of a property. | | | | may allow you to hire and actually be easier that 2 or |
| You can price a property according to the return on | | | | 3 units, where there isnt enough coming in for an |
| cash flow or gross rents and create benchmarks. Its | | | | owner to hire more than necessary. |
| not emotional. | | | | Equity Appreciation: Multi Family doesn't appreciate in |
| Maintenance | | | | market value as rapidly as single-family house |
| Although, you may have more toilet flapper problems | | | | investments. The reason is apartments are valued by |
| to deal with, because you have more toilets, there is | | | | their "cap rate" or net operating income divided by |
| still only one roof and one foundation. This remains | | | | the property value. For example, a small apartment |
| the same whether you have two unit duplex or a | | | | building producing $10,000 annual net operating |
| ten unit property. Costs can be spread out and the | | | | income (excluding mortgage payments) and an asking |
| cash flow of a well run building will help support | | | | price of $100,000 for the property equates to a10 |
| maintenance much easier than if it were a single | | | | percent "cap rate." or a 10% rate of return. |
| family home with only you paying the bills. | | | | Rent Control: The laws designed to protect the more |
| The Market Today | | | | vulnerable puts a limit on the rental increases allowed |
| 1. We have a housing recession, mainly in the single | | | | in any given year. Therefore some properties should |
| family home sector. Sales are slowing and will | | | | be bought only if an equity increase is in the cards. |
| probably get worse before they get better. Rental | | | | The one work around is when a rent controlled unit |
| rates, however are booming. There are a few | | | | becomes vacant. Then the unit can be brought up to |
| reasons why: For a start, when homes become to | | | | market rent. If a tenant has been there for many |
| pricey, the monthly carrying cost of ownership starts | | | | years that can be a significant increase. |
| to look very unfavorable compared to a monthly | | | | |