5 Reasons To Start Looking At Multifamily Properties
By Paul Esajian on September 8, 2017
The best investors are the ones that are willing to adapt to a changing market. Making the shift from single family investing to multifamily may not be something you wanted to do but it is necessarily for growth. You can probably still find good single-family deals but they are slowly becoming more difficult. Depending on your market you and a dozen other investors may be chasing the same deal. The obvious alternative is to look for deals where the demand may not be as high. While multifamily investing has slowly started to gain traction it still lags behind single family properties. There are many good multifamily and commercial deals there for the taking. These types of properties may have been something you haven’t given much thought to but they could hold the key to your businesses future. Here are five reasons to start looking at multifamily properties.
- Supply and demand. Supply and demand is the backbone of the real estate industry. The greater the demand for a property the higher the price will go. The most common starting point for new real estate investors are single family properties. Almost every transaction by a new investor is either a single-family property, condo or mobile home. Because of this prices have started to rise and home run deals have declined. The one area of the business where high spreads are still available is multifamily properties. For a variety of reasons investors shy away from these. They cite the difficulty in financing, management hurdles and increased price points as the main reasons for avoiding them. The reality is that these issues are easy to get past and once you do you are left with a valuable asset, with little demand. You will not have to bid against a dozen other investors in your area for the same deal. They will be some competition but much less than your average single-family property in most markets.
- Scale. One of the hurdles mentioned for not buying multifamily properties is management. Many investors have a tough enough time managing one single family property and can’t fathom the idea of managing a property with five units. On the surface this may seem intimidating but, it is easier than you think. The first reason is because with five units you most likely will enlist the services of a property manager. The higher amounts of cash flow allow you to pay someone to manage the property while still leaving you with residual income. The second reason is because of the scale of the units. Most everything you need for management is under one roof. You are not driving around to check on five separate units. The roof, furnace, yard and parking is all located in the same place, or on the grounds. This reduces the management cost, which allows you to consider property management in the first place. Regardless if you have a property manager or do it yourself having the ability to scale and manage everything on site makes the job much easier.
- Portfolio growth. Why own one unit when you can own five? Of course, this scenario isn’t as easy as it sounds but it is not as difficult either. With multifamily properties you can quickly, and significantly, positively grow your portfolio. In most areas, the price point for a four-unit property is not that much higher than a single family. For a small percentage more wouldn’t you rather have four or five units as opposed to one? The obvious answer is a resounding yes! Additional units give you the ability to earn additional cash flow with must less risk. On a single-family property if your tenant stops paying 100% of your rent is gone. If a tenant in a five-unit property stops paying you still have the other 80% of the total rent pool coming in. While the loss of payment stings it is not as catastrophic as with a single-family tenant.
- Cash flow potential. Regardless of the property or the market there is only so much cash flow you can squeeze from an individual single-family property. You can certainly make a good percentage but you are capped at how much actual revenue it can produce. With a multifamily property you can create a greater amount of real cash flow every month. The extra units give you additional opportunities that just aren’t there with single family properties. Instead of maxing out one unit you can earn from every additional unit the property has
- Appreciation potential. Single family property values are based on comparable sales. It is very difficult to exceed the highest comp unless your property is superior in every way. While multifamily properties still account for recent sales they also factor in cash flow. There are much fewer multifamily properties sales to compare when trying to assign value. Instead of looking at just sales the amount of cash flow is a huge consideration in determining value. Because of this there can be a higher upside in a property with six units. The value is based on what someone is willing to pay for it, which is often supported by leases and real numbers. On a single-family sale if the comparable sales aren’t there you will be disappointed with your value.
Multifamily properties are not just a passing fad that will quickly go away. They are the next big thing in the real estate world, if not so already. If you haven’t started exploring this market the time to do so is now.