What is Multifamily Real Estate?

If you’re thinking about investing in real estate, you’ve probably heard the term “multifamily.” But what is multifamily real estate, and how is it different from buying a traditional rental property?

At its simplest, multifamily real estate is a residential property designed to accommodate more than one household, whether as an investment or possibly multi-generational. It can include everything from a duplex with two separate units to a triplex, fourplex or a much larger apartment building.

For investors, the appeal is fairly straightforward: instead of relying on rent from a single tenant or household, one property can generate income from multiple units.

But that does not automatically make every multifamily property a good investment. As with any rental property, the numbers, location, condition and long-term plan all matter.

What Qualifies as Multifamily Real Estate?

A multifamily property contains two or more separate residential units within the same building or property.

Some common examples include:

Duplexes – two separate residential units
Triplexes – three units
Fourplexes – four units
Small apartment buildings – generally containing several rental units
Larger apartment buildings – properties with many individual residential units

The units may be stacked vertically, located side-by-side or configured differently depending on the property.

You may also come across homes that have a secondary dwelling unit, such as a basement apartment. Whether that property is considered a true multifamily investment depends on how the property is configured, its zoning and whether the additional unit is legally recognized.

That last point is important. Just because a property physically contains multiple living spaces does not necessarily mean they are all legal rental units.

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Why Investors Consider Multifamily Properties

One of the biggest attractions of multifamily real estate is the potential to collect multiple rents from one property.

Imagine owning a single family rental property. If your tenant moves out, your rental income can temporarily drop to zero.

With a four-unit property, one vacancy may still leave you collecting rent from the other three units. That does not eliminate vacancy risk but it can help spread it out.

Multifamily properties can also offer efficiencies because several tenants share one building, one piece of land and many of the same major systems. Depending on the property, that can make managing multiple rental units more practical than owning several individual houses scattered throughout the city.

There can also be opportunities to increase the property’s income over time through improvements, renovations or better management.

The Numbers Have to Make Sense

When we help someone evaluate multifamily real estate in Ottawa, one of the first things we look at is the income and expenses. The purchase price is only the beginning.

An investor should understand the current rents being collected, whether those rents reflect today’s market and what expenses come with operating the property.

Those expenses can include property taxes, insurance, utilities, maintenance, repairs, property management and allowances for future capital expenses such as a roof, windows, plumbing or heating systems.

Financing also plays a major role. A property that looks attractive based purely on rental income may look very different once you account for the mortgage payment and all the other costs involved.

That is why we always come back to one question:

Do the numbers actually make sense?

Buying a multifamily property simply because it has several rental units is not an investment strategy.

Location Still Matters

Multifamily investing is not just about finding the property with the most units. Location can have a major impact on tenant demand, rental rates, vacancy and long term resale value.

In Ottawa, investors may look for properties close to employment centres, universities and colleges, public transit, shopping and other amenities. But the best location will also depend on your investment strategy.

A property aimed at students may have very different considerations than one designed for families, professionals or long-term tenants. Understanding who your likely tenant will be can help you evaluate whether a particular property and neighbourhood are a good match.

Pay Attention to the Condition of the Property

Multifamily properties can also come with more moving parts.

Instead of one kitchen, you may have three or four. The same applies to bathrooms, appliances, plumbing fixtures and other components. An older building may require significant maintenance or upgrades and those costs can quickly affect your return.

Investors should look beyond cosmetic improvements and pay close attention to major systems such as the roof, electrical, plumbing, foundation and heating.

You also want to understand what renovations may have been completed over the years and whether the appropriate permits and approvals were obtained. A lower purchase price is not necessarily a bargain if the building requires substantial work immediately after closing.

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Is Multifamily Real Estate Right for You?

Multifamily real estate can be an excellent option for investors who want to build a portfolio and generate income from several units within one property. It can provide diversified rental income, potential efficiencies and opportunities to build long-term value.

But it also comes with additional responsibilities. More units can mean more tenants, more maintenance and more things to manage. The right multifamily investment should fit your budget, your tolerance for risk and the amount of involvement you want to have as a landlord.

If you are considering multifamily real estate in Ottawa, take the time to analyze the entire investment rather than simply focusing on the purchase price or potential rent.

At the Pilon Group, we can help you evaluate the property, understand the local market and look closely at whether the opportunity makes sense before you buy.

Because when it comes to investing in real estate, finding a property is the easy part. Finding the right property is what matters!