In my live events and webinars, many people ask me, “Why multifamily?” or “Is multifamily a good investment?”.
While I may be biased, I have personally done the single-family rental game, tried my hand at day trading and even thought of wholesaling early in my real estate career. The main issue with all these things is that they did not align with my goals of building a portfolio of assets that would allow me to reach my financial goals. It wasn’t until I understood what multifamily could do that I realized that these investments could help me reach financial freedom.
You may need to decide whether it makes sense to meet your financial and personal goals. Maybe the thought of being responsible for larger deals give you anxiety and you want to stick with stocks. Or maybe you are concerned about the financing. Whatever your reason, you should weight the pros and cons of moving into the multifamily realm and determine if that business is right for you and your goals. I have outlined a few of them here:
Pro #1: Greater Cashflow
In a single family home, when the tenant leaves, you need to cover the mortgage, fees and the turn – all while that property is generating no money at all. In a multifamily, you have many units kicking up cash every month, generating more cashflow. In a larger deal, if you have other occupied units to continue covering expenses, you are still ok. Your break even should be calculated while you do your due diligence so you know the cashflow your minimum number of units will generate.
Pro #2: There is Cash for Professional Property Management
When you have a multifamily deal, there is cashflow to pay a management company to handle tenant requests. On larger deals, there may even be enough cash to have the management company work full time or live on the premises.Property management can be a hassle for a real estate investor that doesn’t have the experience or time and something so important must not be overlooked. While many investors want to do their own management, they very rarely pay themselves the fee. Additionally, the investor needs to be current of all tenant/landlord laws and handling the bookkeeping.
Pro #3: Economies of Scale
In a multifamily, all the units are in one place. They typically share the same roof, boiler, and water tank. Maintenance goes to one place to work on many units rather than running all around town to work on a bunch of single-family homes. All this means you are able to keep your operating costs down.
Pro #4: Options for Forcing Appreciation
This is probably one of the major benefits when it comes to multifamily. As the name implies, you are able to push the value of the property up by adding amenities to get more income or reduce expenses.
This includes simple things like installing vending or laundry to offering doorside trash pickup. You can make one change and your tenants in the community may end up using it. You cannot do this in single family. In fact, appreciation is based on what other people’s homes are worth. Basically, you have very little control over the value of the asset.
Pro #5: Grow Your Portfolio Quickly
Depending on your goals, you may value time spent getting deals closed. If you have aspirations of getting to 250 units and you are closing single family homes one at a time, it will take years to reach your goal. Rather, if you buy a single 250 unit apartment building, it will be significantly less expensive as you are skipping all the extra lender costs, attorney fees, and other closing costs. And, you can conceivably reach your goal in one or several transactions.
Pro #6: Househack by Living in One of the Units
For those starting out doing a residential play with a four-plex, you may choose to live in one of the units and rent the others for the extra cashflow. Because you are onsite, you can handle the management, control expenses and keep an eye on things. Financing is also fairly simple as it’s considered residential.
Now, let’s look at some possible challenges:
Con #1: Can Be Tough to Finance
When you are diving into deals with 5 or more units, you are now into commercial financing. The cashflow and property value as well as your experience as an asset manager become key. This is very different from residential, where they are looking at your personal earning power as consideration to give you the loan. The interest rates are higher, the terms are different, there are larger down payments required and can get complicated to get out of the loan. For those that have never done such a loan, it may be tough to do without an experienced partner.
Con #2: Operational Experience is Required
A multifamily is not passive; It is a business. Coordinating and running construction crews, CPA’s, attorneys and accountants takes a great deal of experience. Yes, your property management company handles a great deal of the load, but you are still the entrepreneur that needs to make sure the machine is in motion. You need to be ready to dedicate time to building the operations around the portfolio of real estate.
Con #3: More People Problems
When you scale up your units, you will scale up your tenants. While some tenants are nice and will take great care of your property, some will treat the property badly and tear up anything and everything they get their hands on. One day, your appliances are stolen. The next, an evicted tenant will purposely flood a unit causing thousands in damage. The demographics will depend mainly on where you are buying, but all tenants and properties – from A Class to D Class – have their sets of issues.
Con #4: Regulations and Local Government Involvement
As investors and landlords, we already have many regulations about how property can be rented and whom it can be rented to. Multifamily has even stricter regulations. Everything from HUD to ADA to Fair Housing comes into play – and that’s just on the Federal side. Your local government is poised to tax you with things like a “unit registration fee”. You will need to do your research beforehand to find out the laws in your area about their requirement or you could break the law or risk fines.
So, as far as an investment, multifamily comes with many pros and cons. I personally believe that investing in multifamily real estate is the best way to generate cashflow and build personal wealth, but that’s me. Again, it depends on what your personal and financial goals are. It also depends on your experience in dealing with tenants and running a business. If you are not sure, perhaps you can start with a duplex or a fourplex to see if it’s right for you. Smaller properties are easier to buy, sell and manage.
Anyway, are you on the fence about getting into multifamily? What is holding you back? Let me know in the comments. I’d love to hear from you.
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