As subtle as it may appear, the difference between single and multifamily properties can be immense. The extra units will impact the down payment amount, time frame, budgets and a slew of other items related to the property. Sometimes the transition can be a smooth one, while other times it can be extremely frustrating. The process is generally the same, but there will be small differences depending on the exact number of units. Multifamily investing may seem intimidating, but it doesn’t have to be. Before you decide to take the leap, here are some of the biggest differences that you need to know:
1. Different Numbers: The biggest difference in single and multifamily properties is with the numbers. On a single-family rental property, you look at projected rents. However, you still lean on the neighborhood to tell you if you have a good deal. With multifamily deals, there are numbers in every aspect of the purchase. The greater the number of units, the more you will have to rely on this data. Things like rent rolls, ROI, maintenance costs, vacancy factors and reserve funds should all be accounted for. Not only do you need to know what all of these mean, you need to know where every dollar is going. If you are relying on projections, you need to know where the data is coming from. Trying to decipher the terms and numbers can get confusing, and – at times – frustrating. If you are even remotely interested in multifamily investing, you need to start by understanding all of the numbers in the deal.
2. Increased Paperwork/Time Frames: It stands to reason that a six unit property will entail more due diligence than a small single-family home. Along with more numbers, the paperwork will be much higher. You will need to be able to break down all of the current leases, evaluate rent rolls, look at repair estimates and understand the small stack of paperwork involved. Before you make an offer, however, you need to accept that the deal will most likely take longer than you think. Once you go over four units, you move over into commercial property territory. Depending on the lender, you may now need an additional appraisal on the property. Unlike with single-family homes that are appraised largely on comparable sales and listings, multi-unit properties are appraised on the money they generate. There may not be another small strip mall for several miles. In order to put both the buyer and seller at ease, putting these deals together takes more time. If you are working with a private money investor who is looking to get in and out in 60 days, a commercial building may not be in their best interest. Increased units mean more paperwork, and an increased time frame to close.
3. More Capital Needed: There are a few ways to look at multifamily expenses. If you own a smaller multi, all of the expenses are basically under one roof. If you need a need roof, driveway, washer/dryer or furnace, you typically need just one for all the units. It is when you start looking at commercial properties that things start to change. One of the biggest mistakes that new multifamily investors make is not having enough capital to do everything right. For starters, if you are looking for a traditional loan the closing costs are typically much higher than anticipated. Between the extra appraisal and other lender costs, things can add up quickly. Next, you need to factor in that not all units are the same. What you plan to spend on one unit may be nowhere near what you spend on another.
4. Larger Team: There are single-family property landlords who feel that one property is difficult enough to handle by themselves. The more units you have, the more difficult it is to manage everything. It is advisable that any property over three units be accompanied by a property manager. In addition to a property manager, you need to find a good handyman and a reliable accountant. You also need a quality Realtor to help you find the next deal. It is important not to work with just anyone. You want to surround yourself with the best possible team. If not, all your time will be spent trying to manage properties instead of finding deals. Before you looking into anything over three units, you need to get a good team assembled.
5. Due Diligence: It may only take a few hours to research a single-family property. On a four unit property, however, the time frame will be extended. Doing your homework can get tedious at times, especially when all of the numbers start to look the same. The minute you let your guard down is when you will overlook something that is right in front of your face. Due diligence on a large building is not easy, but extremely necessary. You need to commit to put the work in and treat each unit the same.
Investing in multifamily properties doesn’t mean you will be more successful, but it does give you many more options. These projects can be the catalyst of your long-term portfolio, or greatly increase monthly cash flow. There are differences, big and small, the more units you start to look at. Knowing and accepting them can help you be more successful.