Many investors who are interested in substantially diversifying their portfolio while maximizing profitability consider buying rental properties at some point. Commonly, new property investors get their feet wet with a single-family rental home or a rental duplex. Some investors are satisfied with one or two residential real estate investments, but others are eager to take their real estate investments to the next level. If you have been thinking about venturing into the realm of investing in properties, there are a few good reasons why it makes sense to build a solid portfolio of multifamily rental properties.
Increasing Passive Income
Multifamily rental properties have the ability to generate higher levels of income for investors over the years. Rental rates are generally determined by market conditions in the local area, and these rates can fluctuate based on many factors. However, overall, a well-managed and well-maintained apartment complex will produce higher levels of income through a general increase in rental rates over time. Selecting a reputable and experienced property management company to assist with daily operations is a great way to promote profitability without having to take an active role in managing your units. Remember that this is net income that is generated on a regular monthly basis, and it is net income after the mortgage payment has been paid. As you add more multifamily properties to your portfolio of investments, your ability to generate increasing levels of passive income can potentially multiply over the years.
Income Derived From Multiple Units
One of the risks that keep some investors from buying rental properties is the possibility of financial loss related to vacant units. With a multifamily property, the income is derived from multiple units. There is not a single unit that generates all income to cover the mortgage payment and overhead. There are typically always going to be at least a few vacant units related to regular turnover when you own an apartment complex. However, a typical multifamily property in a great market with smart financing in place will produce a profit even when the occupancy declines through periodic market fluctuations and turnover. Because income is derived from multiple units, the risk of operating in the red on any given month is diminished.
Multifamily rental properties can provide you with the incredible benefit of diversification in different ways. First, most property investors hold liquid or semi-liquid assets in various types of accounts. This may include a savings account, a non-retirement stock account, a retirement account and more. Real estate is simply another type of asset that diversifies the portfolio. In addition, when you add more properties to your portfolio over time, you are diversifying this specific aspect of your investments.
Income-producing property is one of the few investment vehicles that can throw off substantial and regular income while also appreciating significantly in value. Your properties’ equity increases in two primary ways. One is through value appreciation related to market conditions. The other way is through debt reduction. Leveraging your properties gives you the ability to enjoy full equity appreciation based on the entire value of the property while only contributing a fraction of the funds yourself. More than that, the mortgage balance is reduced regularly through your tenants’ rental payments. These are powerful benefits that can increase your net worth substantially over the years. These benefits are magnified as you continue to make smart multi-family purchases that expand your portfolio.
Another excellent benefit associated with multifamily investing relates to tax benefits. All income is taxed in various ways, but this type of income is taxed based on the net income that is produced. All operating expenses, including property taxes, mortgage interest, property management, property improvements and maintenance, are netted out. In addition, you can also subtract depreciation from the net taxable income figure.
Accumulating a solid portfolio of investment properties makes substantial sense for those who are interested in increasing net worth and diversifying an already expansive portfolio. Remember that a multi-family property manager can be hired to assist with daily operations, and this can make investment properties a passive income source for you. You can also reach out to a Realtor for assistance with the selection of exceptional investments. It may be wise to begin investing in multifamily properties by selecting a smaller property. You can expand your portfolio as your experience with this type of investing activity increases.