The Advantages and Disadvantages of Multi-Family Rental Property

Many people make the decision to buy multi-family rental property when they are new to the real estate game.  Like other forms of real estate investing, there are advantages and disadvantages to doing so.  The advantages include positive monthly cash flow, centralized management of many units vs. single family being spread out, less competition in some cases, expensive repairs to external per unit and better leverage of investment money.

There is a flip side to all of this.  The disadvantages include the possibility of negative cash flow, property management and legal liability. The key to having positive cash flow and decreasing your chance of having to deal with the aforementioned disadvantages of multi-family rental property is to look for an excellent location where rental will be encouraged and in an area where people will want to move to.

Advantages of Multi-Family Rental Property

The cost per unit of a multi-family rental property is less than the cost you would incur to purchase the same number of comparably sized single dwellings. This in turn means more "doors" generating cash flow for your same investment dollars.

A multi-family rental property is never completely vacant because you have other tenants paying rent.  If for example you own a multi family property with three units and one tenant moves out then you are still receiving rent from the other two. You have only to cover one third of the rent to make your mortgage payment. If you rent out a single dwelling and the renters move out then you lose all of your income for the house for the length of time it takes you to find a new tenant.

Financing is much easier and simpler with multi-family properties. The reason for this is that there is less risk to banks because each individual unit is less expensive and costs are always being covered by however many tenants are residing there. This type of rental property is also less risk because it can easily be analyzed by experts using financial ratios such as cap rates and cash flow.

Maintenance and repairs is easier and less costly in multi-family units. You may have more leaky toilets and faucets to fix but the bigger jobs, such as a crack in the foundation or a damaged roof are less expensive because there is only one of these things, shared by the multi units.  

There are tax advantages to this form of rental property. Rental business property can be tax-deferred or swapped for other kinds of investment real estate.

Disadvantages of Multi-family Rental Property

Owning a multi-family property can be very time consuming. You need to know how to effectively communicate with people; you need to know how to properly screen tenants and you need to have good business skills and be well informed about legal issues. This is most definitely a job.

Multi-family units do not appreciate as quickly in market value as does an investment in a single-family dwelling. Apartments for example are valued according to their "cap rate" or the net operating income, which is then divided by the value of the property.

Rent control is another issue and the law is designed to protect renters from exorbitant increases from year to year. Some properties will not be worth your while if an equity increase is not a possibility.