According to many advisors, a great way to diversify your investment portfolio is real estate. An attractive option for those who want to generate a positive cash flow is to purchase a multi-unit property. This is a good choice for several reasons.
May Be Less Difficult to Obtain Financing
A larger loan for a multi-unit property may be easier to obtain than the same size, or smaller, loan for a single-family home, even though it seems less logical at first glance. This is because multi-family properties can generate cash flow every month—even if there are vacancies in the building. For example, if you have a building with four units and one is vacant, it is still 75% occupied and you have some cash flow until you are able to rent the vacant unit. If you rent a single-family home and the tenant moves out, it is 100% vacant and does not bring in any cash until you can rent the home. Because of this, lenders often see them as less likely candidates for foreclosure. If units are rented at the time of purchase, they may also be considered as income for the loan, which could qualify buyers for a larger one, depending on the lender.
May Bring in Returns More Quickly
These properties can be an attractive option for an investment portfolio because they can bring in returns quickly with little added monthly expenses after the initial down payment and other closing fees. They are also fine options for investors who want to build a large portfolio of rental units. Buying a ten-unit building is quicker, and often cheaper, than buying ten separate single-family homes. For example, buying the ten homes would require ten inspections, ten closings, and, sometimes, ten different loans, among other costs. The biggest drawback, however, is that many investors are not interested in the added work of maintaining a multi-family residence. A solution for this is to hire property management companies to handle the day-to-day operations, such as collecting rents, finding tenants, and handling evictions, so investors don’t have to perform these tasks. Property management companies usually charge a percentage of the monthly income and many real estate investors find it worthwhile, especially if they budget for it at the time of purchase.
May Cover Your Mortgage
Another popular choice, which is especially attractive for new investors with less capital, is to buy a multi-family property and to live in one of the units. The rental units can cover most (if not all) of the owner’s mortgage plus build equity in the property. Later on, the owner may decide to move out and rent the whole building for an additional source of income or sell it and use the cash to invest in another property. Residing in one of the building’s units may also provide some financial incentives besides lower living expenses. For example, the investor may be able to obtain an FHA mortgage with lower rates and less money down than another mortgage because it is considered their primary residence, even if it is in a multi-family building. Additionally, at the time of sale, the owner may also be exempt from capital gains taxes if it is their primary residence or has been for a specified amount of time.