For those considering, and those already deeply involved in real estate investing, the question of which is a better option; multifamily or single family properties, is one to deliberately weigh. Firstly, it’s important to understand which investment vehicles do what, and determining your individual goals. In this two part blog series, we’ll take a look at the advantages of investing in both single-family and multifamily properties. First up, we’ll take a look at the various advantages of investing in multifamily real estate.
The first check in the multifamily pro column comes way of operating costs. When you invest in properties that are scattered, the operating expenses are higher and management is more intense than it would be for a multifamily rental property with all the units on one site. You also need to consider the scrutiny you’ll impart on your properties. With scattered single family properties it is more difficult to monitor for behavior that could be affecting the equity of your properties.
One of the biggest benefits of owning multifamily investment properties is the economies of scale. If your property needs maintenance, it can all be done in one location, saving time and money. On the flip side, if you own 20 single family properties and they all need new roofs, a potential two week job has turned into a several month operation, increased costs, and delays on your cash flow.
At the end of the day, real estate investment comes down to one thing – the almighty dollar. When you invest in multifamily properties, cash flow is typically more consistent due to less effect of vacancy; if 2 tenants move out of your 20 unit apartment, you’re still receiving cash flow from 90% of your investment while finding new tenants. If you own one single family property and they leave, your cash flow is now cut off completely until you can find a new tenant. A bigger pool of tenants means less overall risk!
Owning multifamily real estate also comes with several substantial tax benefits. One of the most significant benefits come via depreciation. To encourage multifamily real estate owners to undertake capital spending, the government allows them to take a depreciation deduction against current income equal to 1/27.5 (or 3.6%) of the building’s value at the purchase each year. To simplify, if you purchase a property for $10MM and the land is deemed to be worth $400,000, each year a multifamily property owner is permitted to deduct 1/27.5th of $9,600,000 or $345,600, from current income.
In most cases, this deduction eliminates most or all of the current income. It’s even possible the investor will put money in their pocket and show a loss on their tax return.
The useful life of a multifamily building, in the governments eyes, is 27.5 years, however, it considers the useful lives of certain items, including fixtures, appliances, and carpentry to be much shorter – as little as 7 years. In the example above, if you were to conduct a cost-segregation study, you may find that $2MM of the value of your $9,600,0000 building comes from those particular items. If that’s the case, your deduction would be even greater for the first 7 years – in this scenario you’d be able to deduct an additional $285,714.
Most successful real estate investors have their estate in mind when determining their investments. It’s hard to find a better estate planning tool than multifamily real estate investing. When your time on earth is up, so are your taxable gains. When you die, the government assigns a new tax basis to the properties when they are transferred to your heirs – the fair market value at the time of your death – meaning that all those accumulated gains disappear. If you were to sell the above property for $12MM, the tax basis will reset to the $12MM fair market value, and all the previous capital gains vanish to your heirs.
One of the last tax benefits come from a topic we touched on in our last blog post – Section 1031. The government allows you to defer paying taxes on the sale of your property if you reinvest the proceed in a like-kind investment.
There are many benefits of investing in multifamily real estate, however, with every investment the details can be confusing and time consuming. That’s where we come in! At Pioneer Homes, we’ve been a leader in the real estate investment sector for the better part of the past decade, closing on more than 1,000 deals in Detroit, valued in excess of $50,000,000. We pride ourselves on our transparency, integrity, and providing our investors with industry leading returns on their investments. Click here to view our multifamily investments and learn more about our investment process. Don’t forget to tune in for our next blog post covering the benefits of single-family investment properties.