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Investing in Multifamily Real Estate
As a real estate investor, you may be interested in multifamily properties. Multifamily real estate can be appealing as an asset class and attracts a variety of investors. Active and passive investors have multiple options for investing in multifamily real estate.
Let’s dive into multifamily real estate investing, to find out what it is and the options for your portfolio. Keep reading to find out the major pros and cons plus how to get started.
In this article:
- Ways to invest in multifamily real estate
- Pros and cons
- Steps to get started as an investor
- What is investing in multifamily real estate?
- Ways to invest in multifamily real estate
- Pros and cons of investing in multifamily real estate
- Should you invest in multifamily real estate?
What is investing in multifamily real estate?
Investing in multifamily real estate is owning or investing in properties that house multiple tenants. Multifamily real estate includes apartment buildings, duplexes, townhomes, triplexes, and other types of residential housing. Each unit in a multifamily building has its own kitchen, living space, and bathroom.
Investors may be attracted to multifamily housing because of the cash flows associated with this type of property. Tenants pay rent, usually monthly, and having multiple tenants makes it unlikely that a multifamily building is ever completely vacant.
Investors in multifamily housing may be eligible for the same tax deductions as single-family homeowners. Potential tax deductions include expenses for maintenance and repairs, utilities, operations, insurance, property management, and marketing.
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Multifamily housing owners can also depreciate the rental property on their taxes, which can offset the tax liability of the property’s rental income. Depreciating an asset for tax purposes enables an investor to deduct value throughout the property’s useful life, provided that the property is used for business or to otherwise generate income.
Ways to invest in multifamily real estate
Investors have several options for adding portfolio exposure to multifamily real estate. Keep reading to learn about the various ways to invest in multifamily real estate.
|Investment type||Initial Investment||Ownership Type||Operational Requirements|
|Real estate investment trust||Low||Indirect||None|
|Real estate fund||Varies||Indirect||None|
|Crowdfunded real estate||Low||Direct||None|
|Tokenized real estate||Low||Direct||None|
Investors can purchase and directly own multifamily real estate. The investor retains complete ownership and control over the property and is responsible for all operational aspects. Directly owning a multifamily property requires substantial upfront capital to purchase or finance the property, with many owners requiring mortgages to invest in multifamily housing.
Multifamily property owners must actively find and manage tenants, plus physically manage the property—or they can use a property management service. The property owner is ultimately responsible for all aspects of daily operations, major renovations, and financial management.
Real estate investment trusts
Investors interested in multifamily real estate can take a more passive approach by buying shares in real estate investment trusts (REITs). A real estate investment trust collects income from rental properties and distributes at least 90% of that income to REIT shareholders.
Many REITs focus on multifamily housing, such as the Mid-America Apartment Communities REIT. Shares in REITs can be bought and sold just like stocks, making it easy for investors to diversify their multifamily housing investments.
Investors in REITs can choose specific real estate investment trusts but not specific property investments. REIT managers choose the specific investments and may charge portfolio management fees to investors.
Real estate funds
Real estate funds come in many forms, and many focus on multifamily housing. A real estate fund may be an exchange-traded fund (ETF) or mutual fund, or may even be a private equity fund. Real estate funds generally invest in real estate companies and REITs rather than individual properties.
Shares in real estate ETFs are traded like stocks, making it easy for investors to diversify. The Kelly Residential & Apartment Real Estate ETF is an example of an exchange-traded fund that invests in real estate companies “redefining residential business models through development, redevelopment, repositioning, and investments in technology.”
Real estate mutual funds have varying accessibility and liquidity, although investors can still use mutual funds to diversify their multifamily holdings. The US Multifamily Fund, sponsored by Epic, is an example of a mutual fund that focuses on multifamily assets.
Some investors may be able to access multifamily properties through real estate-focused private equity funds. Private equity funds can generate attractive returns for investors, but the investment minimum—which often exceeds $100,000—is prohibitive for many. Investors in private equity funds generally need to be accredited, meeting certain income or net worth requirements.
Crowdfunded real estate
Investors can access multifamily housing investments by using a crowdfunding platform that specializes in real estate. Crowdfunding platforms fractionalize real estate investments by virtually dividing properties into shares that are purchased by “crowds” of investors.
Multifamily property investors can use crowdfunding platforms to invest in specific properties, and can easily participate in multiple crowdfunding events. The available multifamily offerings vary by the crowdfunding platform, with most real estate crowdfunding platforms not focusing just on multifamily housing.
Investors who use real estate crowdfunding platforms are obligated to cede some control to the crowdfunding platform itself. Traditional crowdfunding platforms can be challenged to efficiently manage legal documentation and communicate well with large numbers of investors.
Tokenized real estate
Another way for investors to access multifamily real estate is by purchasing tokenized real estate. Real estate that’s been tokenized can be any type of real estate, including multifamily housing.
Investors in tokenized real estate own fractional shares—known as real estate tokens—that represent direct ownership of specific properties. Real estate tokens use blockchain technology to signify and secure ownership and can be easily traded in secondary markets.
Real estate tokenization platforms like HoneyBricks use blockchain technology and focus on multifamily real estate.
With HoneyBricks, crypto natives and no-coiners alike can invest in expert-vetted commercial real estate based in the 15 largest US cities. Investors buy their desired number of tokens with fiat (including USD) or crypto, and receive passive income straight to their wallet in 5+ supported cryptocurrencies.
With any investment, it is important to do your due diligence to understand the risks and benefits. At HoneyBricks, featuring the highest quality investments is a top priority. Every property has been comprehensively vetted by their experienced investment team, who have invested over $5 billion across 1,000s of real estate assets throughout the US. Less than 1% of opportunities reviewed make it to the marketplace
Pros and cons of investing in multifamily real estate
Investing in multifamily real estate has both upsides and risks. These are the major pros and cons of multifamily real estate investing:
- Reliable income: Buildings with multiple tenants generally produce reliable income streams. Investors aren’t reliant on just a single renter.
- More financing options: The reliability of income from multifamily housing makes these types of properties relatively easy to finance. Many banks are willing to provide mortgages for multifamily homes more than for private residences.
- Potential tax benefits: Investors in multifamily housing may garner tax advantages, depending on their investment approach. Multiple investing strategies for multifamily real estate can generate tax benefits.
- Fragmented market: The multifamily housing market is large but notoriously fragmented, with legacy owners controlling much of the multifamily property sector. Investors can be challenged to access a wide selection of multifamily offerings.
- Potential landlord duties: Investors who directly own multifamily real estate are responsible for all operational aspects of maintaining a property.
- High investment minimums: Some multifamily investment structures and funds, including direct real estate purchases, require substantial starting capital.
Should you invest in multifamily real estate?
Many investors are attracted to multifamily housing because of its reputation for producing reliable income streams. Investors with enough capital and operational expertise may choose to manage multifamily properties directly, but passive investors or those with limited financial resources may prefer taking a different approach to the asset class. Investors interested in multifamily housing have plenty of options but need to do their own research—and plenty of it—before making any investment decisions.
Ready to explore tokenized real estate investing? Get started at HoneyBricks to invest in professionally managed, high-quality tokenized real estate with as little as $1,000.
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The content of this website is for informational purposes only and does not represent investment advice, or an offer or solicitation to buy or sell any security, investment, or product. Investors are encouraged to do their own due diligence, and, if necessary, consult professional advising before making any investment decisions. Investing involves a high degree of risk, and financial losses may occur.