There are many different ways you can invest in real estate. One of the most common strategies is owning rental income properties. You get a steady source of monthly income, while also benefitting from long-term appreciation of the property value.
A common question we get from real estate investors is whether it’s better to invest in single-family homes or multi-family properties. Both are very strong investment ideas if you manage your properties well. It may depend on your budget and income goals. What we can say is that multi-family real estate investments can be quite lucrative and are worth considering if you are thinking about investing in rental units.
It first helps to understand the differences between passive income and active income as a real estate investor. Which type of income you are claiming will have a direct impact on your tax liabilities, eligible tax deductions and business plan. Active income is earned when you are much more hands-on with your investment property management. You would generally need to have your real estate license and devote a certain amount of time each year to the unit. In other words, you are dealing with tenants directly and handling most aspects of property management. Active income will allow for more tax deductions, but it will also take more time and commitment. Most active-income-earning real estate investors are doing it as their full-time business.
Passive income is more common for people who own income properties “on the side.” You have a long-term or short-term rental property, or you own a multi-family property. Many investment property owners will opt to hire a property management company when dealing with multiple properties/units. They let someone else deal with the day-to-day management of the property and simply collect the payments each month. Or, you may have a very simple rental arrangement that doesn’t require a lot of your time and energy. In these cases, the income you are earning from your rentals is considered “passive” by the IRS. This is the case for a majority of rental property owners who aren’t doing real estate investment as a full-time career. You will still have plenty of tax-deductible expenses you’ll be able to write off (along with any passive losses you can claim), but not quite as much as you would with an “active” income status.
There are many benefits to earning passive income on multi-family real estate investments. Owning multiple units can bring more income potential as opposed to owning a single-family home. Here are a few specific benefits of passive multi-family investing:
Relatively Easy to Get Started—If you can afford to buy a multi-family property or qualify for a mortgage or business loan, you can start earning pretty quickly. You get the units rented out and then collect rent payments each month from multiple tenants.
Protection Against Vacancy—Extended vacancy periods in between tenants can be a drag on profitability for single-family investment property owners. Multi-family properties allow you to hedge your bets a bit more. You have multiple units and multiple tenants. A vacancy period for one unit won’t hurt you as much because you are still collecting rent on the others.
More Valuable Properties—Multi-family property will generally have more overall value and resale appeal compared to single-family homes. There are always other investors out there looking for multi-family investments.
Easy to Manage—If you hire a property management company or live-in landlord, then you can earn passive income without having to do much work personally. This is true for single-family and multi-family homes.
Passive Income Streams—Investing in multi-family properties (or any rental properties) is a great source of passive income. You can generate extra money each month without having to work too hard. There are many tax advantages to real estate ownership and tax deductions you can make to write off property management fees, ownership costs, etc.
Even if active income real estate investments bring more tax advantages, a passive multi-family investment will benefit you in so many ways financially. You can earn extra income and improve your tax situation without having to work too hard. Some people fear that a multi-family investment will require a lot more effort. That’s not true if you have the right plan and have a good property management partner. With the right systems in place, you can really clean up with multi-family rental properties!
To learn more about passive income opportunities like multi-family rentals—and for the best business planning, tax planning and wealth management strategies for your real estate investments—contact Illumination Wealth today.