Investing In Multifamily Properties
By Paul Esajian on December 22, 2014
For many investors, the start of their real estate portfolio begins with a single-family purchase. The prevailing thought is that single-family purchases are both easier and safer than any multifamily purchase. Any additional units are often seen as overwhelming and a source for much more work maintaining and managing the property. In reality, the extra units will provide protection in the event of a vacancy and can provide greater additional cash flow. Buying a multifamily property may seem daunting, but it can be the catalyst for a long, successful portfolio.
There are numerous investors who focus solely on single-family rentals and have made a great living with them. On the flip side, there is another segment of investors who will only entertain multifamily properties as a means of growing their portfolio. With multifamily purchases, you have a greater margin for error and can generate cash flow much quicker. The most common reason investors don’t entertain multiple units is because they believe that financing will be an obstacle. It is true that many investor programs require anywhere from 10-25% down payment, but if you are a first time homebuyer there are FHA programs available with only 3.5% down on a two unit purchase. That said, you can live in one unit while renting the other. The money you bring in can cover most of your mortgage payment while still gaining equity and generating wealth.
Cash flow is one of the secrets of generating long term wealth. If you are bringing in more than the total expenses for the property, you have cash flow. With this money, you can pay down the mortgage, increase your reserve fund or use this for down payment for another property. Cash flow is the building block for generating sustainable, long term wealth and multifamily properties are the vehicle to do it. You would need to buy the perfect single-family house at the right price and in the right location to equal the cash flow that an average multifamily house can generate. With two, three or more times the units, you can grow your business that much faster.
There is a misconception that an increase in units will translate into more work and risk. However, the opposite is often the case. Even if you don’t live at the property, you are protecting your investment with each additional unit you own. If a single-family rental tenant suddenly stops paying, you have to cover the entire portion of the mortgage payment and still need to find a new tenant. If you have a three unit property and one stops paying, it would hurt, but you still have the other two to cover some or all of your mortgage. It may seem like a small conciliation, but if you have ever gone through an eviction you know just how difficult they can be.
Each additional tenant does not necessarily equal additional work. If there is an issue with the roof on your multifamily house, you are still only dealing with one roof. The size of the roof may be larger, but you do not need two or three different roofs. The same is the case for the furnace, lawn, garage and many other items in a multifamily house. Sure, each unit is separate, but dealing with problems inside a unit are often minor in nature. Every other issue that you would worry about with a multifamily can come up in a single-family unit as well. For the same work; why not own additional units?
Because of the stigma and difficulty to finance multifamily properties, there is often far less competition to buy them. This leads to better deals and higher cash flow with the deals you pursue. Even if you have to save or partner up to finance the property, you are walking into a house with instant equity and lower monthly payments. This will increase cash flow and give you many more options down the road. You may only purchase one or two a year, but they will be the pillars of your investing portfolio. If you use the extra cash flow to pay down the mortgage, it is not unrealistic to own the home in twenty years or less.
The most common multifamily purchases are those that are between two and four units. Anything over four units is considered a commercial property and has increased down payment and underwriting guidelines. That is usually the next step of multifamily investing and where real revenue can be made. You can start off as small or as big as you would like, but there is no reason to be intimidated by the additional units. These should be viewed as a positive and not a negative for your business.
If you are interested in buy and hold investing, there is no reason that you should ignore multifamily properties. Each property should always be taken on its own merit, but in general, every additional unit equals more money in your pocket. Single-family rentals are a great way to get started and great way to build your business. However,if you want to build your business faster, you should not ignore multifamily properties.