Investing in single-family homes is a popular strategy for building wealth. But investors also can buy apartment buildings and rent out units or rooms, generating income and additional tax breaks. Here’s a look at some of the pros and cons of owning multi-unit properties:
Pro: More Renters
Renters supply more rental income than single-family homeowners. And if you plan to stay in your property as an investment, renting out units allows you to keep monthly costs low because units are often smaller than mortgage costs on a single-family home. Some investors choose this strategy to accumulate equity rapidly while staying put, living for free, or receiving cash flow from their investment property.
Pro: Potential for Significant Tax Breaks
Investors can deduct the interest on loans used to buy apartment buildings, as well as any depreciation of a building’s value. Depreciation deductions are available to rental property owners, including single-family homes and condominiums that have been converted into rentals. In addition, landlords can usually write off other expenses against their rental income—including money spent on capital improvements and repair costs—to reduce the total taxable income. As with all investments, investors should keep records of expenses so they’ll be able to calculate potential taxes owed.
Apartment buildings tend to offer more flexibility than single-family properties when it comes time to sell. Many investors choose to sell their investment properties in bulk, selling all units or some units and keeping others for themselves. Additionally, since there are more renters than homeowners, the likelihood of an apartment building sitting on the market is considerably lower than with single-family homes.
Con: More Work for the Landlord
Managing a property with multiple units can be more time-consuming than managing a single-family home. More things can go wrong, and, as the landlord, you’re responsible for everything. You’ll need to keep an eye on leases, collect rent, deal with repairs, and oversee any remodeling or updates. If you don’t live near the property, you’ll also need to hire a property manager—which will eat your profits.
Con: Potential for Lower Rents
Since there’s usually more supply of multi-unit properties than demand, landlords might have to offer lower rents to attract tenants. That means lower returns for investors.
Con: Higher Insurance Costs
Insurance costs are often higher for multi-unit buildings than single-family homes. That’s because there are more people affected if something goes wrong—such as a fire or injury to one of your tenants—and there might be limits on the number of renters you can have before your insurance rates go up.