September 2, 2021
Investing in long-term rental properties can be a great way to build income quickly, if you know how to do it. It’s not a guarantee, and it does take diligence and hard work to build a portfolio of residential and commercial rental properties that can support you with its income. The key is finding ways to lower your risk while raising your return on each investment. Most of the time, for those focused on residential investments, this means dedicating a healthy portion of any given portfolio to multifamily real estate.
When you finance a single-family dwelling, your entire income for the property goes away whenever you’re in-between clients. That means you’re out of pocket for any loan payments during the months it takes to turn and fill a property, as well as the utilities and any turnover costs for repairs, improvements, and marketing. When you buy duplexes or even larger properties like apartment buildings, the cost doesn’t scale. A duplex is not typically twice as expensive as a single family home. On the contrary, they are often comparably priced with single-family homes that have the same total living space across the units.
The more units your property has, the lower the cost of the property compared to the potential income. This increase in potential ROI is the same mechanism that shrinks risk. If your multifamily real estate investment only requires 30% occupancy to cover the costs of maintenance, management, and financing, then you have a lot of room for turnover before the property becomes unprofitable. The lower your essential occupancy for breaking even, the lower the risk in the investment, generally. There are also market factors to consider that sometimes lead to a counterintuitive return, but most of the time it’s obvious if they are present when you make a deal.
It takes time to build up the working capital you need to buy large multifamily properties with a lot of units, but you can start the cycle of improving returns by focusing on two and three unit properties at the beginning of your investment journey. These smaller multifamily dwellings are often comparable to the cost of investing in a single-family home, so it’s easier to budget them early in your investment career. You may still need a couple income-generating single-unit houses to get started, though. That’s okay, the benefits of multifamily real estate don’t invalidate investment in other properties. Instead, they help you defer the risks involved, making your entire portfolio more robust.
