There is a popular wave of housing that you should invest in if you have the capital! Multi-family housing developments are that hot item in many areas. But first let us talk about the pros and cons before getting into this business.
What is Multi-Family Housing?
Multi-Family housing can be defined as a single building that is set up to accommodate more than one family living separately. This looks like a duplex, an apartment building, condominiums or a townhome. The dream of suburbia is quickly fading as the purchasing price for single family homes goes up and the family unit size goes down.
We can take a look at a sample area to get a better idea of the multi-family house. Places like San Francisco, California, (land area of approximately forty-six square miles), have a huge market for multi-family housing due to the geographic constraints. Areas like this build vertically, so the housing market is confined to what is buildable. Also, a homeowner has a better chance of profitability if they were able to provide housing for more than one family in an area that has a higher density. Families need a home in these areas; therefore, the chance of a family renting out a duplex or a townhome is highly probable.
What are the Pros of Multi-Family Buildings?
The favorable position of providing multi-family housing is creating spaces in a housing shortage. Think along the lines of no tenant left behind. There are vacancies in larger homes that a multi-family home can make more affordable for smaller families to occupy. This is a positive because many municipalities are aware of this and have supported added density for the aforementioned reason.
With the multi-family use of a property, comes the rental income and taxable revenue received from the property. It is important to know that rental income is taxable, but there are cases in which a rental property can show no net income for tax purposes. Rental income has deductibles that can range from maintenance costs and mortgage interest to property management payments. There are many ways expenses reduce the actual taxable rental income, which is one of the pros.
What are the Cons of Multi-Family Buildings?
Now we must address the cons that can sprout up when making the commitment to invest in multi-family homes. Take into consideration the zoning of the property. Seek professional services and have them go to your local planning department and research the property because some areas have density restrictions based on the community character or zoning. Believe it or not, not everyone wants you to build in their backyard! Rezoning of an area can lead to the valuation of the surrounding properties fluctuating. Notice the character of the surrounding neighborhood because chances are you will not be met with opposition if there are already multi-family homes located nearby, but if the neighborhood is rural residential or has many single-family homes it may become more of a hassle to convince your neighbors that multi-family homes belong in their neck of the woods.
There is a chance that making an existing home or parcel into a multi-family home is not feasible. Do your research on the permitting process to ensure that the venture is affordable and actually legal. As a developer, you want the space to be livable and provide the necessary accommodations to house multiple families. This could include fire access, heat ventilation and air conditioning, proper plumbing and electrical hardware. Providing these accommodations to multiple units is more costly initially and in the case an existing home is to be converted, it may not be feasible. Check with a contractor on the constructability of home conversions, price your options, and be aware of the potential risks on this type of investment.
Some neighborhoods simply were not meant to sustain multi-family housing developments. Increasing the density of an area can be an overall costly task. Infrastructure in areas such as the sewer, water, electrical and even roadway systems can be designed specifically for the single-family residential zones. An increase in density certainly means that the infrastructure needs to be adequate to support more people on the road and living in the area. Developers may even be required to pay to upsize sewer mains or improve roads to mitigate any adverse impacts a multi-family housing development may cause in the area. Make sure the utilities, schools, and fire department can serve the development. Hire a professional to look into local ordinances and the municipal codes to familiarize yourself on the improvements that may be required if developing multi-family housing in their jurisdiction.
Another aspect of owning a multi-family development that many people overlook is making sure there are renters to fill the spaces available. One of the issues to avoid is having a development with empty units. You do not want to be stuck with the monthly costs and no income from the property. If you price your housing within the range of property surrounding your development then finding tenants should not be too much of an issue.
Now Weigh the Pros and Cons
We have taken the steps to present the ins and outs of multi-family housing and what to think about from an investor and/or developers’ point of view. There is a great market for multi-family housing currently when considering the need for affordable housing, added density, and potential income. Also, the growing pains of developing a multi-family housing property such as zoning restrictions, community character, and constructability were explored to give a high-level overview of this type of investment. Taking all those aspects that we have presented into consideration when investing in a project of this capacity will be more beneficial than going into the situation fresh. Prepare by learning the municipality’s codes and regulations you would like to build in and consider the long-term value of your investment. Furthermore, we at Design Everest have a team of licensed professionals that can readily assist you in the permit processing and development of that multi-family building.
Multi-family housing is a need in many places and developing a property can be costly but worthwhile when the feasibility and projected income are considered. Good luck on your new multi-family housing development!
*Note: The content published above was made in collaboration with members of Design Everest.
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