Most people are afraid of change. The catalyst for the average investor is overwhelmingly in favor of buying and selling single-family properties. When presented with an opportunity to purchase a property with two, three, four or even six units, however, they don’t know how to react. While there are obvious differences in evaluating a property with multiple units, the fundamental principles remain the same. If you have had success with a single-family game plan, taking on additional units is not as big of a challenge as you may believe. All you need to succeed is a knowledge of the formulas, the property and all of the expenses. Once you have these covered, investing in a multifamily property should be as easy as any other real estate exit strategy.
Evaluating a single-family rental property is pretty straightforward. You can look at the comparable listings, sales, rent schedules and expenses and come up with an idea of what the cash flow will be. With a multifamily property, many of those expenses are coupled together. Taking on a four-family property has four different sets of tenants, but still only one roof, one yard and one driveway. Instead of thinking that your job is multiplied by whatever the number of units, you may actually be making your life easier.
The biggest difference with “multifamilies” is focusing on the cash flow of the property. With single-family homes you can have modest cash flow if the home is appreciating and there is equity. Many of the values of multifamily properties have undergone massive fluctuation and are prone to changes in the market. Appreciation is nice, but cash flow is the main attraction of multifamilies. With three or four units, you have a multiple tenants to offset your expenses and earn money on. With a single-family, you have one tenant. If that tenant doesn’t pay, you have no other income to fall back on. With three tenants, you have three separate checks coming in which will soften the blow when one tenant doesn’t pay during the lease. Instead of seemingly increasing your risk with additional units, you actually are protecting yourself and your investment.
One of the reasons that multifamily investing is soured by some investors is the difficulty to obtain lender financing. Buying a single-family property is much easier than buying one with two to four units. Any property over four units is considered a commercial property and in another financing class all together. With multifamily investing, the more units, the higher the down payment requirement is. Instead of putting 5 or 10% down, you would need 15-20%. On commercial properties you will need at least 20%, and in most cases 25%. Unless you have capital reserves for the down payment and for any repair work, this makes financing prohibitive and very difficult.
If you are looking for higher monthly cash flow and less risk, multifamily property investing may be for you. If financing is a problem, you can seek out help from a private money lender to ease with the transition. The number of units on a property alone should not deter you from buying it. There is money to be made in real estate regardless of how many units there are.