5 Reasons To Consider Multifamily Property Investing
By JD Esajian on August 14, 2018One of the fastest ways to accelerate your portfolio is by accumulating multifamily properties. With a multifamily property you have multiple income streams that can improve cash flow, accelerate payoff and help build your portfolio. As obvious as this may be, there are still many investors who shy away from multi’s based on the perceived difficulty of management. They assume that because of the additional units there will be increased problems. The reality is that extra units can actually be easier to manage because everything is under one roof.
Like other aspects of the business there are myths and inaccuracies that not live up to the hype. A fellow investor who had difficult tenants doesn’t mean the same thing will happen to you. If you have focused exclusively on single family investing it is time to see the light and at least consider the advantages of owning additional units. Here are five reasons to consider multifamily property investing.
- Increased cash flow. With a single-family rental you are capped as to the income you can generate from the property. There is only so much you can charge and so high the market rent will go. With a multifamily property you have the ability of generating two, three or four times as much rent in one property before crossing over to a commercial piece. This singlehandedly allows you to bring in more cash flow and potentially generate more money. With the extra cash flow you can pay down the note quicker by adding extra principal to the payment, accelerating the time you own the property free and clear. You can also pay down debt or simply use the money in areas of your business you see fit. The bottom line is that extra units open up increased revenue options which can only serve to benefit your business.
- Economy of scale. Owning a three-family property is not the same as owning three single family properties. The rent generated may be identical but there are many stark differences. With individual single-family units they may be scattered across many towns. If something needs to be done on one unit you are forced to travel twenty or thirty minutes every time your phone rings. Doing this a few times a month with multiple properties is not only time consuming but can begin to wear on you and become a burden. With a three-family property everything is under one roof. Instead of mowing three individual lawns you only need to do one. Instead of having to repair three different furnaces there may only be one per unit. Having everything under one roof is a definite advantage, not only for management but for efficiency and cost. This economy of scale will help save on travel, potential management cost, repairs and sanity. It is easier accounting for expenses and knowing where your money is going. Three units in one place are almost always better than three units spread out all over town.
- Decreased risk. There is the common misconception that the more units you own the riskier the property is. There are many landlords who have trouble with one tenant and assume the issues will be multiplied with each additional unit. The reality is that while extra units can bring some increased issues with tenants, by and large they offer increased insurance. When a tenant in a single-family home stops paying you lose 100% of your rental revenue. You are forced to pay the mortgage from personal funds until the problem is resolved, which in some cases could be months. With a multifamily property if one tenant stops paying you have the additional units to help pick up the slack. Losing one of three rents stings, but there is still 66% of the total rent still generated. The more units you have the more protected you are from vacancy and the safer the investment is.
- Competition. For many of the reasons we mentioned, and more, there is a negative stigma surrounding multifamily properties. A large segment of experienced investors has never considered buying a three-family property. That coupled with the slight increase in purchase price leaves a large void in demand. Instead of battling other investors for single family rentals you can avoid the overflow in demand. This can lead to better deals for better properties in markets you truly desire.
- Ease of management. With increased cash flow it may be easier to afford management. This doesn’t mean hiring a property manager is a must, but it is more realistic with additional revenue. A dedicated property manager will take care of almost every aspect of the property from finding tenants to dealing with late night phone calls. If you decide you can manage the property yourself, you have everything you need under one roof. This doesn’t mean it will be easy, but it is certainly easier than if your properties were all over town. You will still have to get your hands dirty and there will still be some frustrating tenants along the way, but you won’t have to drive all over to deal with them.
There are pros and cons with every type of real estate investment. Don’t let the cons of someone else influence your decision to explore a multifamily property. Buying the right multifamily property can be best decision you make.