Why Multifamily is a Great Investment
I’m Dan with the High Yield Real Estate Investing Podcast
And I’m Brooke
Why invest in multifamily real estate versus every other real estate class? If you’ve been interested in real estate investing and have looked into it extensively, it seems everyone has their opinion on this matter. Now I’m not going to tell you that Multifamily real estate is the best and only way to invest in real estate. I have investments in real estate outside of multifamily myself. However, it does have some very distinct advantages over Single Family Homes and the retail and office sector. But your investment criteria may be different than mine. If retail and office weren’t good investments, there wouldn’t be anyone investing in them. For the purposes of comparison, we’ll be comparing multifamily to single family homes. Let’s dive in.
- Banks LOVE lending on multifamily and besides owner occupied housing, large multifamily properties have super low interest rates. When I look for lenders it’s so easy to find ones interested in multifamily. Everyone from the small local bank to the very large Fannie Mae and Freddie Mac have programs for multifamily lending.
-Scalability. How many Single family homes do you have to buy to replace your current income? Each time you buy a property you incur a cost. Title, legal fees, inspection, appraisal, recording fees, etc. Multiply that by the number of Single family homes you need and those fixed costs for each transaction add up. You could do that in one transaction by buying one apartment building with enough units to replace your current income. Plus, you only need to find and buy one building instead of dozens!
-Multifamily is more passive. A Property management firm is absolutely required which makes the day-to-day operations of the property passive from your end. Most people with Single family rental homes probably used to live in those homes and self-manage them. As soon a problem or vacancy comes up you have to take time out of your job or life to solve the problem. A difficult and needy tenant or constantly clogged toilet can drive you mad and make you regret renting out your old home-Unless you have a property manager. Then it’s all transparent to you. Good Property Managers are very efficient at handling maintenance requests and finding new tenants. They have specialized software and plenty of local contacts that can do all the usual tasks to keep up a property on the cheap. The less involved in the day-to-day life of your property the happier you’ll be. Trust me, You’ll mostly be involved in managing the manager!
-Value can be controlled or forced easier. Commercial multifamily is valued by its net operating income multiplied by the cap rate for the market. Anything you do to Increase income, and/or decrease expenses will have a direct effect on the value of your property when it’s time to refinance or sell. How are single family homes valued? By the price that similar homes sold for in the past few months. You can’t control market forces with single family homes, but you do have the ability to exert a great deal of control over the performance of a multifamily apartment complex
-Taxes. While all real estate has very specific and wonderful tax advantages; larger properties than can afford a Cost Segregation Analysis will benefit even more from additional accelerated depreciation benefits uncovered in the study. These cost a few grand and up depending on the size of the property. A Cost Segregation Study isn’t practical for the owner of a single family home or two. The cost of the study alone could wipe out a year or two worth of cashflow in that scenario! Also, each study is specific to the property. However, all the cashflow from a multifamily apartment complex could conceivably be sheltered with the bonus and accelerated depreciation that would come from a cost segregation study. How would you like to increase your income without paying any tax on it?
-Vacancy Factor. I won’t bore you with elementary math here. If your tenant moves out of your single family home and it’s vacant for two months, what’s your vacancy factor? Who pays the monthly mortgage? If one tenant moves out of your 10 unit apartment complex and it takes a month to fill, what’s your occupancy for the month? 90%. Did those other 9 tenants still pay your mortgage, expenses, and put cash in your pocket? Mostly likely, yes!
-Loans. After the 2007/2008 recessions, banks capped the number of residential, personally guaranteed mortgages you can have at 10. But, many apartment communities benefit from having non-recourse financing if the loan is large enough, generally over 1 million. That means that the bank won’t come after your personal assets if you default on the loan. There’s no limit to the number of non-recourse commercial loans you’re allowed to have. But if you buy single family homes and each has its own mortgage, then you’re capped at 10 properties.
-Economies of Scale- Oxford dictionary defines this as a proportionate saving in costs gained by an increased level of production. I’ll give you an easy example. Let’s say a single family home grosses $1,000 a month and a 5plex grosses $5,000. Each have the same sized lawn which costs 40 dollars to mow. What percentage of the monthly rental revenue is the $40 dollar mow for each of our hypothetical properties? It’s a lot less with the 5plex, right? Now expand that concept into a 50 or 100 unit complex and what do you have?
Now, I’m not going to tell you that Multifamily beats single family homes in every aspect. There are a few advantages that single family homes have. But this episode isn’t long enough to accommodate them. Head to our website to find out more. Go to highyieldre.com/podcast/MFH
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So what advantages do Single Family Homes have over Multifamily? See below.
-Lower cost so lower cash required to acquire.
-Most people are familiar and comfortable wit SFHs since they probably live in or have lived on one. That makes the mental barrier to entry very low.
-If you buy in a hot neighborhood the value can increase dramatically without you having to expend any effort.
-Lots of inventory. Besides land, there' are probably more SFHs than all other asset classes. They are easy to buy and sell. There is an army of realtors out there who would love to sell or help you buy a home.
-Pride of ownership. People feel more like they have something of their own they don’t have to share with anyone else. Tenants generally take better care of their property if they have a sense of ownership.
-Vacancies- People come and go from apartments all the time. Tenant turnover in SFHs can be much lower than your Class C or B 2 bedroom 1 bath apartment.