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Why Buy Investment Property or Do I Want to be a Landlord

First lets look at the advantages to buying a multi unit property

Cost per Unit: multi family housing is generally cheaper. The cost of a duplex is less than the cost of two homes. Less debt and therefore less risk also means you have the potential to own more of your property than the bank.

Vacancy Rate

By definition, a multi family property is never 100% vacant, meaning there are always some renters helping to pay expenses. What happens if you lose your tenant in your single family house? You lose all of your income and you have to pay the mortgage out of your savings. If you lose a tenant in a three family house, you've only lost one third of your income. The other two units will help cover your mortgage until you rent the vacancy. One reason why owning small apartment houses is smaller that owning single family homes.

Easier to Finance

Get financing more easily. Money for commercial units was available even during the recent mortgage freeze. For a few weeks in late August to Early of 2007. I think that this is due to less risk, because multi family is less expensive per unit and because there are always some tenants helping to cover costs.

Financing is more available for multi family because investment property can be analyzed using financial ratios like cash flow or cap rates. Lenders love to be able to assess the investment value of a property. You can price a property according to the return on cash flow or gross rents and create benchmarks. Its not emotional.

Maintenance

Although, you may have more toilet flapper problems to deal with, because you have more toilets, there is still only one roof and one foundation. This remains the same wherever you have two unit duplex or a ten unit property. Costs can be spread out and the cash flow of a well run building will help support maintenance much easier than if it were a single family home with only you paying the bills.

The Market Today

1. We have a housing recession, mainly in the single family home sector. Sales are slowing and will probably get worse before they get better. Rental rates, however are booming. There are a few reasons why: For a start, when homes become to pricey, the monthly carrying cost of ownership starts to look very unfavorable compared to a monthly rental. When mortgage rates were very low, the monthly mortgage was often less or equal to a rental. That made home buying very attractive but the opposite is true today.

2. Mortgage money may be easier to get for a well priced apartment building, because its an investment and more transparent than buying a single family home because the cash flow is a good measure of the true value of a property.

1031 Tax Advantages

Rental homes or business property (but not your personal residence) can be swapped, tax-deferred for other investment real estate. IRS Section 1031 makes it possible to exchange and even trade up from a small rental property into a larger investment property investment property worth more more, with little or no eration of capital gains because its possible to avoid the capital gains tax. The Government will effectively let you use the tax owed to them towards a greater down. Now 1031 exchanges are complicated and you should always have a qualified advisor before trying one of these.

Disadvantages

Time Consuming: Multi family ownership is a job. It needs management skills such as dealing with people, tenant screening and all the necessary business skills and legal issues make it difficult. You need to assess your own skills and see if you have the desire to manage people and property. It can be very time consuming. A larger property, say 10 units or more may allow you to hire and actually be easier that 2 or 3 units, where there is not enough coming in for an owner to hire more than necessary.

Equity Appreciation: Multi Family does not appreciate in market value as rapidly as single-family house investments. The reason is apartments are valued by their "cap rate" or net operating income divided by the property value. For example, a small apartment building generating $ 10,000 annual net operating income (excluding mortgage payments) and an asking price of $ 100,000 for the property equates to a10 percent "cap rate." or a 10% rate of return.

Rent Control: The laws designed to protect the more vulnerable puts a limit on the rental increases allowed in any given year. Therefore some properties should be bought only if an equity increase is in the cards. The one work around is when a rented controlled unit becomes vacant. Then the unit can be bought up to market rent. If a tenant has been there for many years that can be a significant increase.

Thanks for Reading


Source by Howard Bell

About Maria Kane

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