Christopher Stout is the Principal of StoutCap. He has been a multifamily real estate investor for over a decade and is a master operator.
Real estate is an expansive asset class, including everything from rental properties to commercial buildings. Even in uncertain environments, the asset can outperform other classes, including stocks, bonds, cash and gold.
Multifamily real estate investment, a strategy where investors buy properties that house more than one family in separate spaces, is an often-overlooked approach, but multifamily real estate can be a smart, strategic financial move for some investors. Specifically, I’ve found that properties with more than 50 units offer a variety of benefits that investors should consider when developing their long-term investment portfolios.
As the principal of StoutCap, a company that manages hundreds of apartments, and a real estate investor and master operator with over 20 years of experience in the residential construction industry, I’ve come to understand this sector intimately, both its benefits and challenges.
Knowing that real estate is a complicated and often convoluted investment environment, I hope to empower decision makers to best identify and assess the investment opportunities before them.
The Benefits Of Investing In Multifamily Real Estate
Multifamily real estate, which includes everything from small duplexes to large apartment complexes, presents a unique set of benefits to investors.
1. Risk Reduction
Investing in multifamily real estate is inherently less risky than many other real estate investments. This is primarily because the risk is spread over many units instead of a single unit. While I’ve found properties with more than 50 units offer the best risk reduction, more is better at any level as it lowers the risk as long as the investment is affordable for the buyer.
For example, the negative impact of a few vacant units becomes less critical compared to a scenario where an owner manages just a single-unit property that lies vacant.
2. Diversification Within A Single Asset Class
Diversification is a foundational pillar of effective investing, allowing investors to lower risk while capitalizing on different economic opportunities and trends.
Multifamily real estate makes diversification within a single asset class possible. In other words, multifamily real estate allows investors to avoid putting all their eggs in one basket, instead spreading them out across multiple units within a single property.
With larger properties, although vacancy is an inevitable reality, the revenue from other occupied units helps maintain the financial competitiveness and viability of the investment.
3. Tax Incentives
Tax laws favor real estate investment. Among the notable tax benefits of multifamily real estate investment is depreciation, a non-cash expense that reduces the property’s taxable income, which can create significant tax savings.
For larger properties, this benefit is even more pronounced due to their higher acquisition costs and consequent higher depreciation expense. This makes investing in large multifamily properties financially favorable compared to smaller ones.
4. Third-Party Management Opportunity
One significant advantage of owning multifamily real estate is the financial feasibility of hiring a third-party management company. While the owner may manage smaller properties, larger ones often require professional management due to the complex responsibilities involved.
The expenses related to property management, including salaries, maintenance, and administrative costs, can be baked into the operating budget, providing more time for owners to focus on strategic matters.
The Drawbacks
Here are three drawbacks of multifamily investing to help investors better understand this asset class.
1. High Entry Costs
One of the primary barriers to entering the multifamily real estate market, particularly for larger properties, is the high initial investment required. These costs can include the down payment, closing costs and immediate maintenance or upgrades the property may need.
This financial barrier can make it difficult for novice investors or those without substantial capital to start.
2. Complexity In Management
While third-party management can relieve some of the operational burdens, overseeing a multifamily property is a complex task.
Property management involves dealing with multiple tenants, various maintenance issues, legal compliances and more. Sometimes, even with professional management, the intricacies can become overwhelming, leading to stress and, occasionally, costly mistakes.
3. Market Risk
As is the case with any real estate investment, multifamily properties are subject to market conditions. Factors like location, economic downturns or even a spike in local crime rates can affect property values and occupancy levels.
Leveraging Multifamily Real Estate For Financial Success
Multifamily real estate can be a smart strategy for investors. This strategy provides a unique blend of risk reduction, built-in diversification, appealing tax breaks and more. Multifamily properties, especially those with over 50 units, weave together the solid value of tangible assets with the consistent revenue of rental units.
From my two decades in the industry, I’ve found that strategic financing, rigorous tenant screening and ongoing market analysis are critical to success.
Relationship-building also plays a vital role—good rapport with tenants, property managers and even contractors can make a significant difference in your investment’s profitability and sustainability. And always have a clear exit strategy and a contingency plan to safeguard against the unexpected.
My advice for those considering this investment route is to be prepared—financially and mentally—for the complexities it involves. Prioritize strategic planning, from how you’ll finance the property to how you’ll manage it. Keep an eye on market trends and be ready to adapt.
And perhaps most importantly, view each property as a long-term relationship that requires consistent effort and attention. By weighing the risks against the benefits, you can make informed decisions that make sense for your risk tolerance and financial goals.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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