The Benefits of Investing in Multifamily Real Estate

Nathan Zito
Nathan Zito

By: Nathan Zito, Associate

Investing in real estate has long been considered a smart financial move. The question is, what asset class? Whether you’re a seasoned investor or just starting out, multifamily assets offer a range of benefits that make it a compelling investment option. Here are some of the key advantages:

1. Steady Income Stream

One of the primary benefits of investing in multifamily real estate is the potential for a steady, reliable income stream. Unlike single-family properties, multifamily buildings generate rental income each month. Even if a few units are vacant, the income from occupied units can help cover expenses and still generate a profit. Additionally, retail and office spaces are often more closely tied to economic cycles and consumer spending patterns. Multifamily properties can provide consistency in revenue regardless of short-term economic fluctuations, making financial planning easier and enhancing long-term stability.

2. Economies of Scale

Operating costs for multifamily properties are often lower per unit than for single-family homes. This is due to economies of scale and distributed costs. For example, it’s generally less expensive to maintain and repair one roof on a 10-unit building than 10 roofs on 10 single-family homes. As assets increase, fixed costs are spread out over more units. This principle extends to other areas like property management, landscaping, and utilities, making multifamily properties more cost-efficient. These savings can be passed on to residents or contribute to higher profitability.

3. Tax Advantages

Multifamily real estate can help investors reduce their overall tax liability and enhance their returns. Some tax advantages include depreciation deductions, accelerated depreciation via cost segregation, interest deductions on mortgage payments, write-offs for operating expenses, potential deferral of capital gains taxes through a 1031 exchange, and deductions for capital improvements. Navigating these advantages with professional guidance and an understanding of evolving tax laws is crucial.

4. Value-Add Opportunities

Multifamily properties often provide more opportunities for increasing value. Improvements like upgrading units, adding amenities, or improving management efficiency can increase the property’s appeal, allowing you to charge higher rents and increase the property’s overall value by stabilizing the asset to well-performing returns. These enhancements not only attract higher-quality tenants but also build equity in the property over time.

In comparison, hotels require significant capital for value-add renovations and are influenced by fluctuating tourism trends. Unfortunately for hotels, Taylor Swift does not tour every weekend. Office spaces, with the rise of remote work, face challenges in predicting the long-term value of improvements, and retail spaces, contending with the surge of e-commerce, often find it costly and complex to adapt to specific tenant needs. Lately, office building owners have been considering the possibility of office to multifamily conversions. However, due to ceiling heights and overall layouts of these builds, it is not always a possibility or the replacement cost isn’t lucrative enough. Overall, multifamily properties offer a more predictable and consistent avenue for enhancing value and generating returns.

5. Lower Risk

Multifamily properties are generally considered less risky than single-family homes. This is because the risk is spread across multiple units. If a single-family rental is vacant, you lose 100% of the rental income. But if a 10-unit building has one vacant unit, you’re only losing 10% of the potential income. This diversification in income sources acts as a safety net, making the investment more resilient to market fluctuations. The office sector is seeing a change in demand, while in multifamily, you can have an office in your room.

6. Strong Market Demand

Finally, there’s strong market demand for rental properties in today’s markets. With the rising cost of homeownership, remote work, and inflation, more people are choosing to rent, particularly in urban areas. This trend is expected to continue, making multifamily real estate a smart investment for the future. The shift towards a more mobile and flexible lifestyle further fuels this demand, providing a solid foundation for long-term growth in the sector.

In conclusion, the multifamily investment class offers numerous advantages and Interra is poised to assist both new and seasoned clients in fully capitalizing on each of these benefits. Contact your Interra representative to learn more about multifamily investment opportunities in the Chicagoland area.

Nathan Zito

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