Investing in real estate is a time-proven method for diversifying your portfolio and creating multi-generation wealth. If you own a vacation home or short-term rental, you may be well on your way! But there are other real estate investments that can help you generate income more quickly and earn a higher rate of return.
Today, we’re going to talk about multi-family commercial real estate. Keep reading to learn more about what it is and why it can be a great investment.
What is Multi-family Real Estate?
Multi-family real estate (also known as multi-dwelling unit or MDU) is a real estate classification for multiple separate housing units contained within one building or several buildings within one complex. In multi-family buildings, units can be next to each other (side by side), or stacked on top of each other (top and bottom).
Common forms of multi-family real estate include apartment buildings, mixed-use buildings, housing cooperatives (co-ops), townhouses, and condominiums.
Are Multi-family Buildings Residential or Commercial Real Estate?
Any single building holding multiple tenants is considered multi-family real estate. However, there is a marked distinction between what is considered a residential and what is considered a commercial real estate (CRE) investment. And that distinction dramatically changes the way purchases are financed.
In multi-family real estate, buildings with two to four units are considered residential properties. Buildings (or groups of buildings) with five or more units are commercial real estate properties.
The distinction between the two lies with the deeds. Properties under a single deed are considered residential properties. For that reason, individual properties like townhomes and condos are considered residential, even if there are many within the same structure. However, buying an apartment complex (with more than five units) is a commercial real estate investment. Duplexes up to four units are also usually listed under a single deed. So while duplexes may hold multiple tenants, they are also often considered residential properties.
Is Multi-family Real Estate a Good Investment?
Because of the investment it requires, owning multi-family commercial real estate is not for everyone. However, investments in multi-family CRE have seen good returns in recent years. Here are a few reasons why they could be a good investment for you:
Multi-family grows your investment portfolio. Multi-family homes are the best type of income-producing properties for building wealth. Whereas you can rent a single-family home to one family at a time, you can rent a duplex to two. If you extrapolate that, an apartment complex (or other large multi-family property) is going to generate higher returns much more quickly.
There’s less financial lag between tenants. If you’re managing a single-family rental, losing your tenants could mean a complete loss of income until new tenants are in place. With multiple families living happily in multiple units, there is less disruption to your budget when one chooses to move.
Financing is surprisingly easy. It will require a much larger down payment to purchase a multi-family commercial property. However, mortgage approval is much easier since lenders are more comfortable approving loans for buildings with multiple tenants. Like you, they see that there is less risk when your cash flow isn’t dependent on a single tenant.
Management is more affordable. Owning multiple units means there is more income to offset the cost of hiring a property manager. Even if you choose to manage the property yourself, it will still be easier to maintain units so close together. And well-maintained units mean less tenant turnover.
Millennials are moving away from home. As younger Millennials and older Gen Z’ers continue to age out of their parents homes, most are renting before they buy. With rental demand on the rise, these young professionals are a key demographic for multi-family housing, especially close to city centers.
Multi-family is a safe bet. There’s no telling what the stock market may do in the coming months. But renters will always need homes. If you enjoy taking an active role in growing your capital, owning rental real estate can be a smart way to diversify your investment portfolio and generate a steady income over time.
Learn more about Multi-family Commercial Real Estate
There are many advantages to owning multi-family properties. From ease of financing to the income they generate over time, multi-family CRE could be a great investment for you.
Are you ready to learn more? Reach out to an NAI Beverly-Hanks commercial real estate agent today.