Have you ever thought about creating a portfolio or a collection of real estate investments? It might sound strange if you’ve been investing in real estate for a while. Think of this collection as a way to show off your real estate investment experiences once you have a bunch of different investments.
There are many ways to invest in real estate, and there’s something for everyone. While they all have their benefits, experienced investors often find that owning apartment buildings with multiple rental units is the best option. And the smartest way to do this is through multifamily construction. Using multifamily construction to grow your real estate portfolio can be a smart and profitable plan, with lots of good points and opportunities. Here’s a detailed discussion on how to make it happen.
What is multifamily construction?
In most cities, multifamily construction serves as a foundational element of contemporary neighborhoods. This involves constructing sizable buildings that can accommodate multiple families within a single property. Multifamily constructions are developed following specific criteria and established procedures. Not only do they offer housing for multiple families but they can also include small shops or commercial spaces on the ground floor. These provide easy access to essentials for residents. The units are designed with separate amenities for each dwelling, including individual bathrooms, kitchens, and living spaces. Utilities are tracked individually, and these units can be bought or rented. As you consider your upcoming project, meticulous planning will be necessary, along with adhering to the regulations applicable in your locality.
There are instances when people mix up what is multifamily construction and what is heavy construction. However, these are actually quite distinct. As previously mentioned, multifamily construction pertains to buildings that can house over five separate residences and are typically around four stories tall. On the other hand, heavy construction involves major projects like stadiums, complex commercial centers, airports, highways, and bridges. These types of projects follow different building codes and require specific materials. It’s important to note that heavy construction projects take a longer time to complete, involve more complex permitting processes, and demand a significantly larger amount of labor compared to multifamily constructions.
Multifamily construction has become a prevailing trend due to its ability to address contemporary housing demands efficiently. Rising apartment construction addresses the need for accommodating more people under one roof. Despite high costs, building multi family homes offsets expenses through economies of scale and efficient land use, the convenience of shared amenities, and the potential for higher rental income. Moreover, changing lifestyles and preferences for communal living contribute to the popularity of multifamily constructions, making them a fitting response to the evolving housing landscape.
Different Types of Multifamily Construction Properties
Various forms of multifamily housing exist. Should you be considering investment in multifamily construction, here are the different multifamily construction types that your project is likely to fall into.
- Condominiums. Condominium buildings represent a kind of multifamily property where the structure’s ownership is divided into separate units. Designed for individual buyers, they cater to specific lifestyles like young professionals or retirees. Condos offer a convenient entry into real estate investment, combining multi family advantages with ownership opportunities. They can also be rented to tenants, ensuring flexibility in income sources.
- Townhouses. Townhouses are a form of terraced housing, connected to neighboring homes in a row, often spanning three or more floors. Initially meant for single-family living, many have been transformed into multiple units. While some new townhouses are built as multi unit properties, this is less common.
- Apartment buildings. Apartment buildings, owned by one entity, rent out separate units to tenants. Nearly 20% of Americans live in multifamily rentals like apartments. While smaller structures can be termed as duplexes or triplexes, larger unit-count buildings are commonly referred to as apartment buildings. These constructions are popular due to their consistent and long-term rental revenue.
- Duplexes, triplexes, and quadplexes. These are the smallest multifamily properties, consisting of buildings with two to four units. They can emerge from homeowners dividing a larger home or as new multifamily construction, often with the owner residing in one unit while renting out the others.
Why should you invest in multifamily properties?
Multifamily properties come in different shapes and sizes. Investing in multifamily properties offers a range of benefits that make it an attractive choice for real estate investors. Here are three significant advantages:
- Easier to Finance
Multifamily properties tend to be more accessible when it comes to financing. Lenders often view them as less risky compared to single-family homes since they generate multiple income streams from the various units. This can lead to more favorable loan terms, lower interest rates, and higher loan amounts. Additionally, financing costs can be spread across the rental income from multiple units, making it easier to cover mortgage payments and other expenses.
- Fastest Way to Grow a Portfolio
Multifamily properties offer an effective route to expanding your real estate portfolio through rental units. Acquiring a single multifamily property with several units allows you to quickly increase the number of rental units under your ownership. This approach also involves securing a single loan, in contrast to the necessity of multiple loans when acquiring numerous single-family properties – each requiring its separate loan.
- Opportunity to Hire a Property Manager
Managing multiple units in a multifamily property can be more time-consuming than managing a single-family home, but it also opens the door to professional property management. As your portfolio grows, the complexity of tasks like tenant screening, maintenance, and rent collection can increase. Hiring a property manager allows you to leverage their expertise and streamline operations, freeing up your time to focus on further growth and investment strategies.
Financing a Multifamily Construction
When an investor plans to develop a multifamily property, they often seek out one of the available multifamily construction loans. These loans work just like any other real estate loans, but they do exhibit unique differences that differentiate them from other forms of real estate financing.
The primary aim of a multifamily construction loan is to secure funding for the construction of a multifamily property. For renovating multi family properties, multifamily rehab loans are available. When an investor seeks a construction loan, they must provide the lender with specific project details, total project cost, available down payment, total assets, overall income, vacancy rate, and projected revenue. These factors determine the loan amount a borrower qualifies for, often determined by a loan-to-value (LTV) ratio based on the property’s total value. Most construction loans cover around 80% of the project’s total value.
Construction loans usually cover a timeframe of 12 to 24 months. Once the project is finished, borrowers need to start repaying the entire loan amount along with interest within a year or two. Just like any other loan, borrowers begin the monthly payments once the property is up and running. The interest rates can vary depending on the creditworthiness and what’s happening in the market at that time. To get a rough idea of the monthly payments, you can use a multifamily mortgage calculator. Just plug in details like the home price, down payment, loan term, and interest rate, and it’ll give you an estimate of what to expect.
Multifamily Construction FAQs
Is multifamily construction a residential or commercial type of property?
These properties are essentially homes, but they’re often classified as commercial constructions and investments. This is because they’re typically seen as commercial ventures designed primarily to generate profit, rather than serving as the owner’s personal residence. However, this distinction can sometimes become less clear, especially when dealing with smaller properties.
What is the difference between multifamily vs. single-family property investing?
Single-family properties are homes with just one living space. In contrast, multi-family properties include separate units built for more than one household. This group includes apartment buildings, condos, duplexes, and triplexes. Both types of properties provide a steady rental income, but multi-family properties can potentially earn more because they have more units. Having more tenants also makes the investment less risky. However, it’s worth mentioning that maintaining and fixing multi-family properties might be more expensive.
What can multifamily construction property investments do to my tax?
When you invest in multifamily properties, there are various tax advantages to consider. You can deduct operational expenses like management fees, insurance, and marketing costs, as well as maintenance expenses. Legal and professional services, like those provided by property management companies, are also deductible. However, it’s important to be mindful of potential capital gains taxes that might apply when dealing with commercial or multifamily property investments. To minimize tax burdens, strategies like 1031 exchanges, putting funds into an Opportunity Fund, and using tax-loss harvesting can prove to be helpful for investors.
Invest for Passive Income and Retirement Opportunities with Multifamily Construction
While we’ve covered numerous benefits of multifamily properties in your real estate portfolio, it’s essential to note potential downsides too. These properties often come with higher costs compared to single-family rentals, and their maintenance requirements can be more demanding. However, as previously discussed, having an experienced and successful property manager can mitigate these concerns effectively.
Investing into multifamily construction demands a significant upfront investment of time and effort. However, if executed properly, multifamily properties can serve as an excellent avenue for passive income and retirement investing.
KEY TAKEAWAYS
- Multifamily construction offers a savvy avenue to diversify your investment portfolio while creating a dependable income source through rental real estate.
- Multi-family properties have the capacity for increased earnings because of their multiple units.
- Multi-family rentals often boast simpler financing options, expedited returns, and the advantages of economies of scale.
