Is it about time you considered adding multifamily real estate to your real estate portfolio?
For what it’s worth, there are more than a few ways to get the ball rolling on your real estate investing career. It’s entirely possible to pick one of the many niches provided by the housing market and use it as the catalyst for your endeavors. Whether you are interested in wholesaling, flipping or leasing properties, there is likely an exit strategy you would feel comfortable starting out in. The options made available to you are so varied that the odds of not finding a particular niche to suit your needs are slim to none. It’s worth noting, however, that of the many options made available to new investors, few may offer more reasons to start sooner rather than later than multifamily real estate investing.
Multifamily real estate is a classification of housing reserved for buildings with multiple units. Otherwise known as multi-dwelling units, the term multifamily real estate is traditionally used to describe apartment complexes, as each building consists of several rentable living spaces. However, the multifamily moniker can also be used in conjunction with duplexes, triplexes, townhomes, and other buildings designed to house different families in separate units.
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Through no fault of their own, new investors hear the words multifamily real estate investing and instantly develop a stigma; they are immediately convinced that their experience, or lack thereof, would prevent them from making a name in the multifamily industry. After all, its very name implies a degree of technicality that only experienced investors can attempt, but I digress. Multifamily real estate investing is no more difficult than the most rudimentary real estate exit strategies. In fact, I would argue that multifamily real estate investing is perhaps the best way for new investors to get started in the industry.
Aside from the intimidating name, multifamily real estate investing is anything but. All things considered, it remains one of the best way for new investors to get their feet wet for a myriad of reasons. Let’s take a look at some of the most important reasons new investors should consider investing in multifamily properties:
Gives investors the ability to live in one unit while renting out the rest.
Tenants can help investors pay down their own mortgage.
Multifamily rental properties share many of the same amenities, which lowers potential maintenance costs.
With multiple tenants, investors are able to mitigate vacancy risks.
Multifamily properties tend to come with better financing options than single-family homes because they are viewed as more risk averse.
For starters, multifamily real estate investing awards savvy entrepreneurs the ability to simultaneously live in one unit while renting out the rest. If you invest in a two-unit building, for example, there is no reason you can’t live in one half of the property while leasing the other. In the right market, the money you collect in rent could offset the amount you owe on the mortgage, and then some. It’s reasonable to assume, provided the numbers work, that you can live mortgage free while your tenant pays down your principle. It’s almost too good to be true; you can conceivably have your tenants pay down the mortgage on your first rental property.
In addition to having your tenants pay down the mortgage, multifamily real estate investing coincides with considerably less maintenance than that of your typical single-family rental unit. And while that may sound counter intuitive, let me remind you that a multifamily property shares certain features. While you may have multiple units, chances are you only have to worry about one roof, one HVAC unit, one yard and one foundation. Multifamily real estate investors don’t need to run the gambit of fixing more than a few big ticket items; you never have to worry about fixing more than one roof, yet you are collecting multiple rents. And while there are exceptions, you can find units that match your criteria. Done correctly, you can significantly reduce the amount of maintenance to expect on a property.
For those investors with big aspirations, which I hope is everyone reading this, multifamily real estate investing is also a great way to scale your rental portfolio. If for nothing else, it’s a lot easier to acquire a six-unit apartment building than six individual single-family homes. Buying six individual properties means six different closings; that means you are signing six different contracts, closing six different escrows and working with six different sellers. No matter how much experience you have, something like that will take time. A multifamily property, on the other hand, could give you just as many assets with only investing a sixth of the time in this particular scenario.
Perhaps even more importantly, acquiring six units through a multifamily property will most likely require a single loan. In buying six single-family homes, you will most likely need multiple financing options. In the amount of time it might take you to simply receive approval from just one lender, you could potentially have a multifamily unit under contract and ready to move on.
Generally speaking, most new investors are scared of multifamily investment opportunities for one simple reason: the price of admission. In most cases, if not all, the price point on a multifamily property will eclipse a complementary single-family home. The numbers are relatively simple; the more units, the more money it will likely cost. And while that may be enough to scare away some investors, know this: securing a loan for a multifamily property is more likely to be approved by lenders than the average single-family home.
Why are banks more willing to lend to investors of multifamily properties than single-family homes you ask? The answer is simple: multifamily real estate coincides with an increased propensity towards monthly cash flow. Even with a few vacancies, it’s entirely possible for multifamily properties to remain “in the black.” Single-family homes, on the other hand, don’t share the same luxury. In the event a single-family home loses a tenant, it becomes a non-performing asset. Truth be told, real estate is a numbers game that favors those with multifamily units. When all is said and done, the likelihood of foreclosing on a multifamily unit is less than a single-family property, which the bank views favorably.
It’s worth noting that banks aren’t the only lenders willing to lend to those seeking funds for multifamily properties. Not surprisingly, private money lenders will view the right multifamily property as a sound investment as well. Seeing as how private money loans are asset-based, they are more likely to lend on investments with a more secure, promising return. More often than not, the numbers on multifamily properties are more attractive and more attainable than those on single-family homes.
Multifamily real estate provides investors with a great entry into the world of investing. However, not unlike every other exit strategy, there are ways to optimize performance and mitigate risk—the two cornerstones of a great investor. With that in mind, here are some of my personal favorite tips for investing in multifamily real estate with a higher degree of success:
Find Your 50%: The single greatest thing an investor can do before thy buy a multifamily property is to run the numbers. Specifically, determine the difference in expected income and expenses. The resulting number will give investors a better idea of their free cash flow. However, not all investors will have access to all the data they need. If that’s the case, using the 50% rule will provide a good safety net. Simply take the expected income and cut it in half to estimate a safe income. The difference between your estimated monthly income and estimated monthly expense is your net operating income (NOI). With the income cut in half, the margin of safety is greater than usual. This strategy, of course, is only intended to be used in certain circumstances.
Calculate Your Cash Flow: If investors have all of the date they need, the 50% rule isn’t necessary. Instead, with the correct numbers, investors will be able to determine their approximate cash flow. This is the money left over after all of the expenses have been accounted for. This number needs to be enough to justify the investment in the first place.
Figure Out Your Cap Rate: After identifying the cash flow of a subject property, investors need to figure out how long it will take to make a return on their investment. Otherwise known as the cap rate, this calculation can give investors a better idea of how long they can expect to make a return on their investment.
For the better part of a decade, investors have enjoyed a great ride. Returns on investment have grown for nearly eight consecutive years. However, 2020 is turning out to be different from what many people expected. In particular, the Coronavirus has derailed a lot of plans in a relative short period of time. As a result, the investor landscape is still attractive, but slightly different. For example, new multifamily real estate trends in 2020 are becoming more pronounced. Let’s take a look at what investors can expect from the multifamily real estate market in 2020:
New Developments: Prior to 2020, developing new multifamily units was a priority for just about every city. If for nothing else, a lack of inventory is partially to blame for years of historic appreciation. However, the presence of the Coronavirus has delayed builder projects. Multifamily units that were expected to be built this year may be pushed back, which will impact supply and demand. As a result, its safe to assume prices will go up for the foreseeable future, at least until new builds can increase inventory.
Increased Millennial Demand: Millennials have already established themselves as the dominant buying force in the country. However, those who can’t afford today’s high prices will most likely turn to renting in multifamily units. Until prices drop, which they may do slightly in the wake of the Coronavirus, Millennials will likely make up a large portion of renters in multifamily units.
Secondary Market Performance: Builder inactivity during the Coronavirus is expected to detract from initial inventory forecasts. Consequently, new inventory will not be brought to the market as soon as originally planned. As a result, competition over listings will remain high and increase prices. In respoinse, secondary markets with more attractive prices may seen an influx of demand as people escape more expensive cities.
Not unlike the stock market and the recent ascent of real estate investment trusts (REITs), the housing sector awards savvy entrepreneurs multiple exit strategies to realize their goals. As it turns out, one of the best ways for new investors to do so is through the idea of multifamily real estate investing. Don’t let the name fool you. While multifamily real estate can be as complicated as you want to make it, it’s also one of the best ways for new investors to get started.