You have decided to take the leap into real estate and become an investor. That is great but now you are confronted with a buffet of potential paths. Some of these paths lead to a truly professional business and others lead to a job. You could go with wholesaling single family homes, but many would argue that is not really investing but rather a transactional business model. Wholesaling does have some rather good benefits, mainly its low barrier of entry. This is because most of the time you do not take possession of a property so you can start with a relatively low amount of capital. Maybe you watched a cable TV show and you got the bug to flip homes. Again, this is a very transactional business and does not fit common definitions of an investment; you need to keep your volume up to be successful in this business. Maybe you saw an advertisement for a weekend class that will teach you how to invest in notes. This one ticks most of the investment criteria boxes but once the note is paid off your investment is gone, and you do not have control of when that occurs. Plus, the interest earned on the note is taxed as regular income, so you lose out on one of the main benefits of real estate investment. Perhaps you inherited a single-family home from a relative who died, and you decide to fix it up and rent it out. Maybe you purchased a home and needed to move for work, but you owe more than you can recoup by selling so you decide to out it up for rent. Maybe you are in one of countless other situations where you find yourself with a home and either cannot or do not want to sell it and you choose instead to rent it to someone else. This is the most common type of real estate investing in the country with more than 12 million homes being rented in the US according to a recent Bloomberg article. Maybe like some other people you drove past an apartment and said to yourself that one day you will own one of those properties. That set the wheels in motion so you read, researched, and networked and now you are comfortable with the idea that yes, you can and will own that apartment. For the purposes of real estate investing, we consider the single-family home up to the 4-plex as the same class. These properties can all qualify for owner occupied financing and can be purchased with a normal homeowner loan. Once you get to 5 units and more you need to investigate commercial financing, this is where the true multifamily operations begin. This is also the point where the magic starts. So, why multifamily?
Economies of Scale
Closing on a property can be a drag, you have the stack of papers to sign and go through, you have the due diligence and the inspections. You have the logistics of the old and new property management companies. You need to have insurance and utilities turned over; the list goes on. For a real estate deal, you need to do this for each closing, which if you are investing in single family homes, needs to happen for every individual unit. If you want to scale to 50 units, you will need to go through 50 closings. On the other hand, you can do the same thing with one closing on a 50-unit apartment building. In single family homes. along with the 50 separate closings you also have 50 separate roofs, furnaces, foundations, and hot water heaters. In an apartment you can work with only a single roof, furnace (likely a boiler rather than a furnace), foundation or hot water heater (there could be more than one but usually each unit will not have their own) which will greatly cut down on the repair and maintenance costs you will have in the future. Ability to Force Appreciation
In multifamily investing you have many opportunities to increase the Net Operating Income (NOI) through income generating activities or through expense controls. For an apartment complex it may make sense to add a dog park for your residents, this will not only make the property more marketable and desirable to a larger demographic. Attracting residents with pets is a great way to make additional fees including a pet application fee and monthly pet rent. It probably would not make much sense to add a dog park to a single-family residence. An apartment you could also add a business center, club house or community pool. All would make your property stand out and allow you to increase revenue. You could also decrease the expense either through instituting a Ratio Utility Billing System (RUBS), bringing property management in house, installing energy and water saving fixtures, or through proper maintenance. Low Volatility
Historically, apartments have experienced lower variability around rent and vacancy than other asset types. This creates a much more stable asset and it makes the resale more predictable. A single-family home's value is dictated by the market comps whereas the value of an apartment is based on the performance of the asset combined with the market cap rate. Tax Advantages
Rental housing is a great vehicle to save on taxes owed to the government but apartments, with the accelerated depreciation, and a clearer path to a 1031 exchange, is a superior vehicle to single family homes. Leverage
Unlike stock investing, you can buy an apartment with money loaned to you from a bank. If you have $100,000 you can buy $100,000 worth of stock or $400,000 worth of real estate. Because of the security of real estate, banks will loan up to 80% or even 85% of the value of the asset to help you purchase it. Banks cannot loan you the money to buy their own stock, but they love lending you money to purchase property, that is how much they have faith in real estate. The changing demographics leading to a nation of renters
Since the Great Recession, the US has seen a steady rise in the rate of the home renters versus ownership. The reasons for this are many from the increase in difficulty for some to qualify for a mortgage to the 90s children who saw their parents lose everything because it was tied up in a house that was lost to foreclosure. Some people desire to be in the hip and trendy new neighborhoods which tend to be apartment areas rather than single family neighborhoods. As of 2016 it was estimated that 36% of US households rented which was up 5% from 10 years earlier. Millennials and baby boomers are renting at an ever-increasing rate and many of them are looking for apartments rather than homes. Third Party Management
Because of the scale of apartments, it is easier to justify employing third party management. In fact, many times your lender will require outside management to protect their investment, your loan, and the property. Single family homes are difficult to efficiently manage because they are usually spread around a city or MSA, so they pose a location challenge. They also have different finishes requiring more repair parts to be on hand. Apartments are a different story. You can have 50+ doors in a single physical location which means you may be able to afford to employ a full-time maintenance technician. You can negotiate better pricing with outside management too, at times as low as 3.5% of the net rent versus up to 10% in a single-family rental. Ability to Syndicate
Apartments allow you the ability to provide others the opportunity to invest in cash flowing real property. Because of the cost of these assets there is a good chance you will not be able to afford the down payment on your own so you will need the help of others. This allows you to form a syndication to raise the equity needed to purchase the property. The people who invest in your syndication may not otherwise have been given the opportunity to invest in real estate. Conclusion For the reasons listed above we strongly believe multi-family real estate is a superior vehicle for investment over single-family homes. The scalability and returns combined with the tax benefits and the ability to manage them as a true business are some of the primary driving factors when making our decision. From the beginning our goal has been to own a business, not a job or a hobby and multi-family is the clearer path to that goal. If you have any questions or if you would like more information please reach out here and we can schedule a call to discuss your investing goals.
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