Multi-Family Development vs. Multi-Family Rentals
Which is the better investment in today’s market: multi-family development or multi-family rentals?
In reality, one isn’t clearly better than the other; they each have unique benefits. But those benefits can make one or the other a better fit for you.
Plus, there’s a secret third option most investors don’t talk about: Multi-Family Build to Rent.
So, in this post, we’re going to explain the differences in these multi-family investment strategies. We’ll also provide the pros and cons so you can determine which type best serves your goals.
What Is Multi-Family Development?
Multi-family development is constructing a new multi-family structure from the ground up, with the intention of selling the completed development as soon as possible.
The goal of this opportunistic investment is to get in and get out, collecting returns quickly so you can reinvest in a new project and compound your real estate earnings.
What Are Multi-Family Rentals?
Multi-family rentals are long-term holdings of multi-family buildings, where the focus is on passive cash flows generated from rental income.
With this model, investors typically purchase existing multi-family buildings (either turn-key properties that are ready to rent or neglected properties the investor can add value to before renting).
Pros and Cons of Multi-Family Development for Investors
The benefits of multi-family development include:
- Shorter investment timeline. Projects are typically completed and sold within 18–24 months, allowing investors to cash out and reinvest in new deals more quickly.
- Strong return potential. The construction phase creates significant value, paving the way for stronger annualized rates of return.
- No long-term headaches. Once the property is sold, the buyer handles ongoing concerns like maintenance, resident retention, and rent collections.
Possible downsides of multi-family development include:
- Potentially higher tax rates. To earn lower long-term capital gains tax rates, properties need to be held in service as a rental for at least 12 months. Selling upon completion of the build means profits are taxed as short-term capital gains, which are typically taxed at the same rates as earned income (higher than long-term capital gains).
- Time-sensitive sale. The goal is to sell quickly. This may create a challenge if the property is completed when the market is slow and finding a buyer is difficult.
- No ongoing cash flow. Investors don’t hold the property long enough to benefit from recurring rent payments.
Pros and Cons of Multi-Family Rentals for Investors
The benefits of multi-family rentals include:
- Tax breaks. Long-term rental investors may qualify for tax benefits like property depreciation and operating expense deductions, which reduce their tax liability. Plus, if the property is held in service as a rental for more than 12 months, the profits from the eventual sale will be taxed at lower long-term capital gains tax rates.
- Ongoing rental income. Once the units are occupied, rental income starts flowing. However, mortgage payments, maintenance, and other ownership-related expenses will substantially cut into this income stream.
- More selling flexibility. Since the property generates income, there’s less urgency to sell and more time to find the right buyer.
Possible downsides of multi-family rentals include:
- Slower value growth. Equity builds gradually through market appreciation and debt paydown rather than the fast forced appreciation of new construction. However, you can speed up equity building by adding value through renovations.
- Your investment funds are typically tied up long-term. It could be many years before you can cash out your initial investment to invest it in a new deal.
- Ongoing maintenance and management. Older buildings may require more upkeep, and managing multiple units can be a difficult, time-consuming job.
The Best of Both Worlds: Multi-Family Build-to-Rent
With Gatsby Investment’s innovative Multi-Family Build-to-Rent (BTR) model, you can build value like a developer and hold for long-term gains like a rental investor. Without any prior experience or time commitment!
Here’s how Gatsby’s Multi-Family BTR works:
- We construct a new building from the ground up. Just like our traditional developments, we force appreciation to create fast equity for investors.
- We hold the property as a rental for at least 12 months. This allows the profits from the eventual sale to qualify for favorable long-term capital gains tax rates.
- We manage the operations while sharing the rental income. You don’t have to worry about finding renters, collecting rent, or addressing maintenance requests. Our team does it all for you while still giving you your share of the rental income.
- We have flexibility in selling the property. Since the property generates income, we don’t have to sell. If market conditions happen to be slow, we can wait until there are more buyers willing to pay higher prices.
- We sell the property and disburse profits to investors. When the time is right, we sell the property and give you your share of the profits (which, again, are taxed at lower capital gains rates).
This hybrid multi-family BTR model is perfect for investors who:
- Want to maximize gains through development,
- Prefer lower taxes through long-term capital gains,
- Don’t necessarily need monthly cash flow to live on but want strong after-tax returns, and
- Appreciate a strategic exit rather than a rushed one.
Does this sound like the right fit for you?
Learn more about Gatsby’s Multi-Family Build-to-Rent investment opportunities and choose your next real estate investment today!