Multi Family Real Estate Advantages
There are many sectors in the commercial real estate space: retail, office, warehouse, self-storage, and multi-family. The multi-family sector is preferred because it can weather a downturn in the economy better than the rest. In a poor economy every other real estate sector will be affected more than multi-family – that’s because everyone needs a place to live, even if the family budget is tight. A multi-family investment can be structured to ride out a downturn, has a favorable loan option to provide excellent leverage, and can offer an asymmetric risk vs. return characteristic when structured correctly.
The key to success in real estate is to be able to ride out a downturn. One sure way to lose money in real estate is to sell a property or take out a new loan at a time when the property’s value is lower than the sale or loan value. If you structure your long-term loan with a fixed interest rate, you will be able to ride out an economic downturn. That’s because history shows that a property will eventually return to its value, or even higher. When a real estate loan is structured this way, it provides safety.
The return on a multi-family investment can be very high because of leverage. Multi-family is one of the few investments that allow a borrower up to 80% of loan to value. With this kind of leverage, a nominal increase in the real estate’s performance will increase the overall value substantially. As an example, to buy a $4 MM property, you only need to come with $1 MM if you can get a 75% LTV loan. If you increase the value of the property by 25%, you have just doubled your investment. That is the power of leverage. You can also add value to the property by increasing rent, lowering expenses and/or market appreciation. The bottom line is, the property only needs to increase value nominally for the overall return on the investment to increase by a substantial amount.
The key to success in real estate is to be able to ride out a downturn. One sure way to lose money in real estate is to sell a property or take out a new loan at a time when the property’s value is lower than the sale or loan value. If you structure your long-term loan with a fixed interest rate, you will be able to ride out an economic downturn. That’s because history shows that a property will eventually return to its value, or even higher. When a real estate loan is structured this way, it provides safety.
The return on a multi-family investment can be very high because of leverage. Multi-family is one of the few investments that allow a borrower up to 80% of loan to value. With this kind of leverage, a nominal increase in the real estate’s performance will increase the overall value substantially. As an example, to buy a $4 MM property, you only need to come with $1 MM if you can get a 75% LTV loan. If you increase the value of the property by 25%, you have just doubled your investment. That is the power of leverage. You can also add value to the property by increasing rent, lowering expenses and/or market appreciation. The bottom line is, the property only needs to increase value nominally for the overall return on the investment to increase by a substantial amount.