The main advantage of multifamily investing is that it provides investors with the opportunity for a steady stream of income. With this type of investment, investors are able to rent out the units to tenants and receive a consistent, ongoing return on their investment. Multifamily investments also offer the potential for a higher return on investment than other types of investments, including single family homes, with less risk.

Multifamily properties also perform better in a recession. While different assets across the quality spectrum will behave differently, people always need a place to live. As multifamily homes generally have lower rents per unit than a single-family home, occupancy generally tends to hold steady even in a downturn.

One of the major upsides of investing in multifamily properties is the guarantee of reliable monthly cash flow from renters. Since multifamily properties are rented out to multiple individuals or families, there’s a reduced risk of vacancies — even if a tenant moves out, you can anticipate rental income from the remaining occupied units. Additionally, in a strong rental market, you will be able to fill vacancies fast, getting back to the initial, higher cash flow.

The primary disadvantage of multifamily investing is that it requires more capital upfront than other types of investments, apart from other, large commercial assets. Multifamily investments often require a larger down payment than other types of investments, as well as larger monthly mortgage payments.

Additionally, multifamily investments can require a significant amount of time and effort to maintain, as tenants must be screened and managed, and repairs and upgrades must often be made to keep the units in good condition. While a property management company can help with all of these operational aspects, this comes at an additional significant cost.

Finally, multifamily investments can be subject to a number of legal and regulatory issues, such as zoning and landlord-tenant laws. Investors must be aware of applicable laws in their area, and may need to consult with an attorney or other legal expert before investing in a multifamily property. Additionally, investors may need to obtain the appropriate licenses in order to rent out the units, which can add to the complexity and cost of multifamily investing.

The risks associated with multifamily investing include expensive purchase costs, rising construction costs, construction delays, and the potential for investment outcomes not meeting expectations.

Buying multifamily properties is significantly more expensive than buying single-family homes, therefore, it is usually hard to enter the market as a first-time real estate investor. While banks are usually eager to provide loans, buyers should be able to come with around a 20% downpayment, depending on the real estate market or the size of the property. Source

Construction costs have risen dramatically over the past few years, impacting both ground-up development projects and renovation work. Make sure you do your research and plan ahead with a strong budget before beginning apartment renovations to avoid any nasty surprises. Source

Construction delays are also an unfortunate fact of life. Due to supply chain issues, some cannot be avoided — so it may be best to take a very conservative approach in terms of your project timeline. Don’t assume you will have rents in place the month after your capital improvements are scheduled to wrap up. Source

Finally, your renovation work may simply not be enough to get the investment outcome you’re looking for. You may invest a lot of capital to add the highest-end luxury amenities to a property built in the 1980s — but if potential renters are looking for a newer building, you may not see much of an uptick in occupancy or rental revenue. Source

Investing in multifamily properties comes with several tax incentives. It’s possible to deduct operating expenses and maintenance costs, including management fees, insurance, and marketing costs, or any legal and professional services, such as property management companies.

The bonus depreciation allowance from the Tax Cuts and Jobs Act can provide significant benefits until its elimination in 2027. Additionally, with a 1031 exchange, you can essentially swap one property with another, similar property, deferring all of your capital gains in the process. It can be complicated, of course, but it’s generally not taxed as a sale so long as you exchange one asset with another broadly similar commercial property.

The best strategies for financing a multifamily investment depend on the investor's individual needs and goals. Generally, the most common ways to finance a multifamily property include conventional loans, FHA loans, and private money loans. Each of these financing options has its own advantages and disadvantages, so it's important to do your research and understand the terms of each loan before making a decision.

Conventional loans are typically the most popular option for multifamily investments, as they offer competitive interest rates and terms. FHA loans are also a popular option, as they offer lower down payments and more flexible credit requirements. Private money loans are another option, as they can provide quick access to capital and are often more flexible than conventional loans.

For more information on the pros and cons of each financing option, check out The Pros of Investing in Apartments Early and The Most Common Ways to Finance a Multifamily Property.

The most important factors to consider when investing in multifamily properties are your investment objectives, the type of property you want to purchase, how you will handle the everyday operations of the property, and the market you choose to invest in.

Your investment objectives should be clearly defined before you start searching for a desirable apartment building. Multifamily is typically loosely defined within the industry as a property with five or more units, but it can also encompass duplexes, triplexes, quadplexes, townhomes, and other housing assets designed with multiple families in mind. Depending on market conditions, available capital, and operational plans, each property type has its advantages and disadvantages worth analyzing before settling on any one.

You should also consider how you will handle the everyday operations of the property. Being a landlord can be time consuming and take a lot of effort, but many first-time investors and those with smaller properties end up tackling the daily operations on their own. Larger investors often own multiple properties and cannot stretch their efforts between them all, which leads to the utilization of property management companies.

Finally, you should consider the market you choose to invest in. Many first-time investors purchase properties close to home, mostly to be able to manage or keep a close eye on the asset. However, it can be beneficial to scour multiple markets in multiple regions in search of the ideal environment to chase your original multifamily investment goals. Shopping around in different markets can help you find a great deal.