There is more than one way to invest in real estate. One of the most intimidating hurdles in the real estate world is taking the leap to multifamily investing. The common thought is that with increased units comes increased risk. The reality is that the opposite is often the case. Sure, multifamily properties can be more difficult to obtain but are often far less risky than single family properties. In fact the rewards often outweigh the risk. There is nothing wrong with single family investing but multifamily properties should not be blindly ignored. If you are on the fence as to whether or not multi’s are for you here are four advantages of multifamily investing.
- Cash Flow. On a single family property you have one rent coming in. With multifamily properties there is almost no limit as to the number of units you can have. When most people think of multifamily investing they usually think of a two or three unit house. Multifamily investing also includes commercial, mixed use and apartment rentals. On a large apartment complex you can have 100 units or more. This increase in units directly increases your cash flow. This doesn’t necessarily improve your net income but your cash flow amount is much greater. Increased cash flow reduces risk. With a single family property if your tenant stops paying you have no cash coming in. On a ten unit property if one tenant doesn’t pay that is only 10% of your total units. While this scenario isn’t ideal it is much easier than dealing with an eviction and trying to offset the entire monthly payment. This alone makes it much more of an attractive investment in relation to a single family property. A single family property may be easier to sell but a multiunit property is less risky partially due to the increased cash flow.
- Competition. If you have avoided multifamily properties for years you are not alone. In fact you are much more the norm than the exception. Once the extra unit or units are added to the mix many investors run for the hills. This greatly decreases the competition for these properties. Like anything else in the real estate world the less competition the easier the property is to acquire. Instead of competing with a dozen other investors for a property there may only be one or two interested people. On large apartment and commercial complexes there is often little to no competition at all. There are other hurdles to acquire these properties which are largely financial but reduced competition allows you to streamline the process. Instead of wasting time on single family properties that you may not end up getting your due diligence can be rewarded. Anytime competition is reduced it greatly increases the chances you can get a property you really want.
- Management. One of the most common reasons that investors shy away from extra units is the perception of increased work. As crazy as it may seem you may actually end up working more on a single family property than you would on a ten unit. There are many single family owners whose cash flow is paper thin. Instead of spending money on property management they are forced to do everything themselves. Every time the phone rings or something needs to be fixed they are the ones handling it. Over time this becomes too much to bear and they look to simply get out of the property. With multifamily properties the increased units give you increased cash flow. This gives you the option of hiring a property management company to take care of the property. You will still get the occasional phone call but you don’t need to hop in your car every time the toilet clogs. Your property will pretty much run on autopilot while you focus on other areas of your business.
- Appreciation Potential. One of the golden rules of real estate investing is never count on appreciation. This is true regardless of the number of units. While your focus with multifamily properties isn’t necessarily on appreciation there is greater upward potential. With a single family property you are at the mercy of the local market. You may have made great improvements and have strong cash flow but it doesn’t necessarily translate to increased value. With most multifamily properties comparable listings and sales are far less important. Buyers look at certain rental formulas and calculations to determine value. If the property is running at maximum cash flow and the local area is on the rise your property will appreciate. In most cases the appreciation levels are much greater with the more units you have. Some of the wealthiest in the world have accumulated their wealth with multifamily properties. Increased appreciation is never a guarantee but the potential is much higher with increased units.
While there are some differences in single and multifamily investing the process is essentially the same. You are still looking to generate rental income which relates to value. Like anything else you do in real estate you need to be comfortable with how you invest. If a multifamily opportunity presents itself don’t dismiss it solely based on the additional units. Once you close your first multifamily deal you will discover that it was often much easier than you anticipated.