5 Reasons To Purchase Multifamily Properties
By Paul Esajian on February 5, 2018
The key to any good portfolio is diversification. Regardless if you are talking about stocks or real estate the more diverse your portfolio is the stronger it will be. Over the past decade there has been a definite shift in the way people invest. If you tell someone you are a real estate investor they almost automatically assume that you work on flips and rehabs. Long gone are the days of buying a property and holding it for the long term. However, if done right you can build yourself a profitable, long-term portfolio. Instead of focusing solely on single family rentals there is a growing need for multifamily properties. With strong demand, high upside potential and wide appeal ever investor should at least consider this option. Here are five reasons to purchase a multifamily property today.
- Wide appeal. Single family rentals are great in some markets, but don’t work quite as good in others. There are many individual renters who simply don’t need, or want, all the space a home provides. They would much rather have something a little smaller, and affordable. A multifamily property often appeals to a much wider pool of renters. When most investors think of multifamily properties they think of large commercial or mix unit buildings. However, a two or three family house also fits this bill. A two-family property with 1000 square feet per unit is almost always more profitable and in higher demand than a single-family property with 1500 square feet. With rental demand not showing any signs of slowing down it makes sense to own as many units as possible. Single family rentals can be a strong niche but don’t dismiss the appeal of individual units.
- Ease of management. There is no question that dealing with tenants can be challenging at times. Even one tenant in a single-family rental can dominate your time and attention. The prevailing thought is that dealing with additional tenants and units is often not worth it. The reality is that additional tenants doesn’t always mean additional headaches. In fact, in many cases dealing with extra tenants is actually easier. Additional units give you the ability to earn extra income. With this income you can justify paying a property manager. For just 10% of the rent received they will handle almost every aspect of the property from finding new tenants to making sure you get your rent on time. Even if you opt to manage the property yourself you are still only going to one physical location whenever an issue pops up. You have one roof to maintain, one driveway to shovel and one basement to keep clean. You will not be forced to scramble around to multiple properties all over town. Like any other property if you have good tenants in place things tend to be a lot smoother. Rental property management is always a challenge, but additional units shouldn’t stop you from moving forward.
- Portfolio growth. Not every property you purchase makes a good rental property. Even if property is in a good location and has all the amenities it may not create the return you anticipate. Finding the right rental takes a combination of growth in the market along with sufficient demand. Some great buyer markets simply aren’t great for rentals. Instead of slowly looking for the perfect rental you can accelerate your growth with multis. A two-family property produces two rents, generating additional revenue. With every additional multifamily purchase, you make you speed up the growth in your portfolio. Instead of owning five single family rentals you may get a better return with a three family and a two-family property. This allows additional free time and income that will help jump start your portfolio. Single family rentals are perfect for some markets, but in others can take years to accumulate.
- Potential returns. There is no such thing as a risk-free investment. Every property carries at least some kind of risk. The key in real estate is weighing the risk versus the reward. Most single-family properties are relatively safe in nature. Unless you totally whiff on the market and the improvements you should be able to make a profit. However, you may be limited in just how much profit you can make. All sales are based, in part, on other sales in the area. If the comparable sales are weak your property may suffer. Where a multifamily property differs is that buyers will also look at the revenue it generates. A property that produces strong cash flow will be held in higher regard to buyers than single family properties in the same market. This allows you to generate a higher sales price and ultimately make more profit.
- Supply/demand. It can be frustrating constantly missing out when new properties hit the market. Many of the good single-family properties you want are often scooped up in days. Instead of butting heads with fellow investors on the same properties, multifamily properties have reduced demand. This allows you to get more offers accepted and close more of the deals you really want. Fighting with fellow investors for the same pool of properties is frustrating and can lead you to deals you don’t really want.
If you haven’t explored the option of a multifamily property you should at least entertain it. They may seem intimidating at first but when you get down to it they are just like any other investment.