Why invest in multifamily units? There may be more advantages than you think…
More individual investors are stepping up and graduating to this real estate investment sector. This is also a niche that has consistently been a favorite with very sophisticated investors and funds. Here are just some of the benefits that may even outshine what you find among single family homes and luxury condos.
- Better Return on Your Time Searching for Deals
Searching for, screening and negotiating deals can be very time consuming. If you go through 100 listings to just close on one property, it may be more profitable if that is a multifamily property versus single family home or condo. You could be picking up 150 units in an apartment building for the same amount of work and time invested. Consider the ROI on your time per hour.
- More Efficient Property Management
Property management can be a full time job for a whole team of people. It normally isn’t a real profit center until a company gets to a high volume of units. It requires a lot of supervision and contacts. Even if you have a small portfolio of single units spread around your city, you’ll either lose a lot in gas and time efficiency, or deal with potentially higher costs with different vendors and taking up more of their time. With an apartment building you only have to worry about one site. Even your advertising costs to secure new renters will be much lower. You could even negotiate rent in exchange for`property management services. That could really help your cash flow, while costing very little.
Contrary to the popular misconception, financing commercial properties doesn’t have to be much more complicated than single family homes. In fact, some investors say they find financing multifamily units much simpler. There may be an extra inspection report (environmental), the numbers may be bigger and rent rolls to collect. Yet, other parts can be easier.
Seller financing is often more common in the commercial real estate space. You may find access for more sophisticated capital partners. Commercial mortgage on offer can include Fannie Mae backed affordable multifamily loans and non-recourse mortgages. In general, loans are qualified based on the asset, not the individual investor and their personal finances.
- Deeper Diversification
You can easily drop $1M for an entry level home in some cities. If you one tenant doesn’t pay or you can’t rent it, then you are toast. At a minimum you are forking out money for the bills every month. Worse, you could end up with squatters, vandals or higher vacant property taxes. If you bought a 10, 20 or 50 unit apartment building somewhere else, chances are you’ll always have some rent coming in. Even at a 75% vacancy rate you are far better off. The time it takes to turn units for new tenants will be less risky too. Having multiple tenants in different careers gives you more security too. If one employer goes down, the other tenants should be able to keep paying their rent.
- Return on Improvements
Renovating can take time and money. You need a good return on every line item. With an apartment building or even fourplex, one improvement can benefit multiple income producing units at the safe time. Think one pool instead of four or ten. Think creating and staging one model unit instead of many spread out ones. Even new signage and marketing positioning can deliver better returns.
- Cost Per Door
One of the top reasons investors switch to mulitfamily is the cost per unit. Typically this is much lower with apartments. You may find a triplex for not much more than a single family home, or get a 20 unit building for the cost of four single family homes. Yet, the rents may not be much different.
- Income Stability
Rentals are always in demand. Even if homes and condos are not selling or conventional home loans dry up, people need to rent. Even in a recession or the pit of a financial crisis, people are going to rent. In good times, the rents can just rise higher, faster.
- You Can Always Move In
Small 2-4 units multifamily properties have often been the first choice for new investors. Some call this ‘house hacking’. If you can find the right numbers, you can live in one unit for free, and have others paying your mortgage, adding to your equity and wealth, and funding your investments and retirement fund.