Taking the step from single-family to multifamily investment properties can completely change your real estate business. There are many investors who have built strong rental portfolios exclusively with single-family properties. While there is something to be said for not changing something if it isn’t broken, there are other options available. That second, third or fourth unit will open up options that you may not have thought were possible. With the extra cash flow you receive, it will help accelerate the growth of your business. It may also give you the confidence to take on bigger projects in the future. If you are on the fence as to whether multifamily properties are for you, here are a few reasons why you should take a look:
1. Increased Cash Flow: The income from the extra unit or units that multifamily properties provide will not exclusively give you extra cash flow. That being said, the right multifamily in the right location can do just that. With an increased amount of units, you can often generate more income than you would over just a single unit. There are many investors who are afraid to take the step because they feel it will be too overwhelming or cost prohibitive. In reality, those that can handle one unit should be able to handle multiple units. In some cases, it may be easier. Since all of the units are located on the same property, everything you need is in the same space. This may be more cost effective if you need to repair big ticket items like a roof. Regardless of the number of units, there is still only one roof, one driveway or one front yard to take care of, as is the case with single-family homes.
2. Reduced Risk: Some investors believe that multifamily units are riskier. However, the opposite is often the case. When you have a single-family property, you are reliant on only one tenant to pay their rent every month. If that one tenant stops paying, you receive no income until the situation is rectified. Technically the same can happen with a multifamily property, but the chances of nobody paying are much slimmer if you vet tenants accordingly. If one tenant fails to pay, you still have income coming in from the other tenants. This is still not an ideal situation, but it is better than the alternative. This allows you to soften the blow and get through any short term problems. It will also make the transition from lease to lease much easier. Instead of potentially having a gap between tenants, you should constantly have income coming in.
3. Decreased Competition: Most of the real estate rage focuses on single-family rehab properties. This leaves the door open for multifamily investors. With decreased competition in many areas, property values have remained flat, and in some cases gone down. Guidelines for multifamily properties currently require a down payment of anywhere from 15 to 25 percent of the purchase price. Not every investor has the resources or wants to come up with this down payment. This is another reason why many multifamily properties have remained on the market, just waiting for someone to make an offer. Some of these properties will need repairs, but there is not the overwhelming demand that pushes prices upward. In any real estate markets, it is better to be one of a few investors going after a property than one of the many chasing the same one.
4. Greater Initial Equity: Because of the down payment guidelines, every time you purchase a multifamily property you start off with a good amount of equity. In addition to the high down payment, you have the opportunity to build equity by getting the property at your price on top of adding value through any work you do. In contrast to many single-family properties, you are now starting with a large amount of equity. This gives you options and flexibility – at least more than a single-family property would offer. You can pull cash out through a refinance in six to 12 months. You can rent for a year or two, and if the market turns you have a strong equity position to consider selling. You can also use this equity to switch loan programs that will accelerate the pace in which you own the property free and clear. Regardless of what your property goals are, you can use the equity to your advantage.
5. Don’t Stop at Four Units: Most investors consider multifamily as only two, three or four units. While these are certainly the most popular, you do not have to stop there. Once you get a taste of multifamily properties, the possibilities are limitless. From there, you can venture into the world of mixed use and apartment investing. After that, you can look at strip malls and other large multifamily complex buildings. Going from a few two-family properties to an apartment complex is not that far of a stretch. Once you gain the confidence and experience necessary, you should no longer be intimidated by the number of units.
Before you invest in any type of real estate, you need to educate yourself as to what you are getting into. The number of units should not be something that holds you back. Taking the step into multifamily properties can completely change the way you do business.