For many investors, multi-family or multi-dwelling properties offer a significant opportunity to simplify the day to day management, administration and headache that often comes with owning multiple single dwelling properties. In 2019, we are seeing a significant rise in the number of multi-dwelling homes on the market and investors are starting to see the real benefits of this property strategy.
However, there are a number of Pro’s and Con’s that must be considered for any investor interested in adding a multi-dwelling property to their portfolio.
When is a property considered multi-dwelling, rather than commercial?
Generally speaking, a multi-family property is a building or dwelling that has multiple units, where families live. Common examples include duplexes, triplexes, townhouses and villa complexes. Usually, a single property with multiple dwellings does not meet the requirements to be approved for a standard home loan product so investors may need to look to residential development loans.
When the number of individual units on a property exceeds 4, that is when we are starting to talk about commercial development loans, which can be significantly more difficult to get approved.
Most investors in multi-dwelling properties aim to keep the total number of individual units at either 4 or below to simplify their loan application and management.
The Pros of Multi-dwelling Properties
- Rental Income is higher
Naturally, when there are multiple units in one property, investors add additional streams of rental income to their investment. Often, when purchasing multi-dwelling properties, the total cost of the property is significantly less than had they purchased single-family homes individually, and rental yields, when considered over the entire investment, are usually higher.
- Simplifying Administration and Management
It goes without saying, that each property you choose to add to your portfolio creates additional initial administration, when managing loan applications, bank refinancing etc. However, investors would also attest to the fact that each property also adds significant ongoing administration to their portfolio. Depending on the nature of the multi-dwelling property, there can be economies of scale when it comes to managing the property, for example, common property, strata management, property insurance management and management of council regulations and applications.
- Lower Risk of Total Vacancy
Because there are more individual units in a multi-dwelling property, the risk of total vacancy, and therefore nil revenue streams are very low. Even if a tenant moves out of the property, you will have other leases in place to provide continued cash flow to service the costs of owning the property and servicing the residential development loan.
- Less Competition at the Time of Purchase
Usually, there are fewer people in the market looking to invest in multi-dwelling properties which means that competition for this niche section of the market is lower than say, your average 3 bedrooms single dwelling. This often means that sellers are particularly motivated, and see selling the units in “bulk” as a simpler exercise, therefore they can be willing to offer better concessions at the time of sale.
The Cons of Multi-dwelling Properties
- Financial Barriers to Entry
It goes without saying that multi-dwelling properties require a higher level of investment than a single home or unit. Though individually every “single unit” is lower in price than a standalone investment, the fact that you are required to invest in all of them at once means investors in this type of property need to have deeper pockets or higher levels of equity.
- Higher Deposits are Required.
Unlike single dwelling investment properties, which can often be purchased with as little as 5% to 10% of the total loan amount, multi-dwelling properties purchased under a residential development loan often require up to 20% to 30% deposit from most lenders and banks. This means that anyone wanting to get into multi-dwelling investment would need higher levels of liquidity than the average investor.
- Savvier Investors in the Market
Whilst we previously mentioned that the number of competitors in the market for this type of investment is significantly lower than standard properties, the investors who are in the market are generally highly experienced. Depending on the property, this can make both private sales and auctions competitive in a different way.
- Stock Availability
When compared to the stock on the market for units, and houses, multi-dwelling properties are much rarer. Whilst investing in a single-family home can be a very quick process, trying to find the right multi-dwelling property to add to your portfolio can be an extended process. Savvy investors are patient, and they wait for the right property at the right time to maximise their returns.
If you are looking at getting into multi-family or multi-dwelling investment properties, it can in fact be a very lucrative addition to your portfolio, with lower levels of risk when it comes to both stability of Income.
If you are wanting to find out more about residential development loans, please reach out to discuss your needs.
Bernie Kyne
Mortgage Consultant
0400141757
bernie.kyne@mortgage-express.com.au
