Investing in real estate is a formidable avenue for wealth creation, but determining the optimal investment strategy poses a significant challenge. Many seasoned investors initiate their real estate journey by venturing into single-family homes. As their property portfolio expands, the logical progression often involves partnering with a property manager to alleviate the burdens associated with day-to-day management tasks.
Despite the advantages of property management, a growing number of single-family home investors encounter a desire to scale up their investments but are dissuaded by the process of adding more properties to their portfolios. Very often, their interest turns towards multifamily properties.
While both options have their advantages, there are several compelling reasons to scale up from single-family investing to multifamily investing. In this blog post, we'll explore those reasons and help you make an informed decision about your investment strategy.
Reason #1: Higher Potential Returns
One of the primary reasons to invest in multifamily properties is the potential for higher returns. Multifamily properties typically generate more rental income than single-family properties because they have multiple units. This means that even if one unit is vacant, there are still other units generating income. Just imagine a 100 unit apartment complex; if 2-4 units are vacant, most likely you can still pay all expenses and produce some cash flow. If you own 2 homes and one of them is vancant; 50% of your income goes away.
Expenses are also spread out across many units. Costs associated with landscaping or management are less per unit compared to single family properties, which can mean a higher NOI, or Net Operating Income. That said in other words it is usually cheaper to manage multifamily properties per unit than homes.
Reason #2: Less Risk
Investing in multifamily properties can also be less risky than investing in single-family properties. With single-family properties, if the tenant moves out, the property is vacant, and the investor is responsible for covering all expenses until a new tenant is found (mortgage, insurance, taxes, maintenance, utilities, etc).
With multifamily properties, however, the risk is spread across multiple units. If one tenant moves out, the investor is still generating income from the other units. Additionally, multifamily properties can be less susceptible to fluctuations in the housing market. While single-family properties may be affected by changes in the local housing market, multifamily properties are influenced more by the local rental market, which tends to be more stable.
Your risk as a passive investor is also less. You enter the team as a limited partner, which means you have limited liability if anything were to happen at the property. Be sure to read your legal documents carefully and speak with your attorney to fully understand your liability risks. If you invest in a single family home, all the resposabilities and liabilities are yours.
Reason #3: Greater Control
Opting for multifamily investments provides investors with a heightened sense of control over their investments. In the single-family territory, investors are subject to the changes of the local housing market. A decline in property values leaves investors with limited recourse, necessitating a patient wait for market improvements, as single-family home values are contingent on comparables.
Contrarily, multifamily investors have greater influence over property value. Through strategic interventions such as renovations, upgrades, and enhancements in property management, investors can actively increase the property's value and, subsequently, the returns. The value of a multifamily property lies on the Net Operating Income (NOI), affording investors a degree of insulation from neighborhood dynamics. Increase the value of a property through renovations and better management is called "forced appreciation" by the way.
Reason #4: Easier Financing
The process of financing a multifamily property is often smoother than securing funds for a single-family property. Multifamily properties are typically categorized as commercial properties, enabling access to commercial loans with lower interest rates (yes, you heard that, lower interest rates!) and extended repayment terms. The resultant affordability and manageability make financing multifamily ventures a more attractive investment.
For passive investors engaging in real estate syndication, the burden of navigating lenders and qualification processes is avoided. In the single-family home space, every subsequent property acquisition involves the challenge of qualifying for a new loan, eventually culminating in limitations on the total number of loans—an intricate process marred by complexities. There is no limit for commecrial loans an individual or company can get.
Finaly, for single family homes you get a recourse loan or mortgage; which means if you cannot pay the mortgage for any reason, the lender or bank comes after you. As a limited partner in a real estate syndication; your liability is zero if for any reason the loan cannot be paid.
Reason #5: Economies of Scale
Multifamily properties enjoy the advantageous dynamics of economies of scale. Expenses such as landscaping, maintenance, and property management can be distributed across numerous units, culminating in reduced costs per unit. This operational efficiency translates into a higher Net Operating Income (NOI) and enhanced cash flow, directly contributing to augmented returns for investors. As an example: imagine the difference of owning even a small 16 unit apartment complex vs 16 homes; in the apartment complex everything is centralized and in the same location; with single family homes, you or your property manager will be driving around the city to take take of repairs or maintenance.
Conclusion
While initiating real estate investment with single-family properties serves as an effective entry point, the transition to multifamily properties presents an avenue for even greater returns, mitigated risk, heightened control, and streamlined financing. For those poised to elevate their real estate endeavors, exploring the multifamily market is very attractive, offering a bunch of benefits.
As a passive investor in a real estate syndication, multifamily investments provide an opportunity to capitalize on these advantages without being restricted by the intricate challenges associated with direct landlord responsibilities.