Advantages of Buying Multifamily Home Investments over Single Family
Many people these days are getting into house flipping looking to make great profits in real estate. However in this article we will see the benefits that investing in multifamily properties can have over single residences. There are five main benefits we can highlight to illustrate our point:
- Less Effort to Purchase: Consider the time difference that it would take to buy 20 single family homes as opposed to one 20-unit residential complex. You would have to deal with multiple visits, closings, and due diligence before you even put in a bid on a property. Wouldn’t it be easier to look at one property, negotiate with one owner, and complete just one closing? This way you could focus on your business and grow it without being pulled in several different directions.
- Economies of Scale: Maintaining each property separately can be time consuming and expensive. When you think about it, each property has to be mechanically serviced, landscaped, snow plowed, roofs kept in good condition, and any tenant issues must be dealt with as they arise. It is very difficult to achieve an economy of scale by owning a vast number of units spread all over, especially if you’re not in close distance to these properties. When all units are in one location, the per-unit expenses go down considerably. Collecting rent and performing maintenance becomes much easier. Multifamily properties let you scale up your investment quicker and hire property managers and maintenance workers. It is easier to service multiple tenants in one location and achieve higher rents.
- Mitigating Risk: If you owned a single family residence and it goes vacant you would have to cover the mortgage. But if you owned a 10 residence property and two tenants vacate, you still have multiple rents coming in to cover the expenses. The investment lends itself to an investor model, where the stream of revenue will be enough to cover your expenses and still generate cash flow each month.
- Controllable Appreciation: Single family homes are purchased using a sales based approach. This means using comparable home values in the area (“comps”) are used to find a property’s’ value. By contrast multifamily properties use the income approach, by which a property is valued by the revenues it produces. This difference is notable because you have control to force the appreciation of the property by increasing the NOI or net operating income. One doesn’t have to wait for market forces to drive the appreciation. If one uses a good repositioning strategy on the property they can generate wealth quickly.
- Less Competitive: With most people focusing on single family fix and flip properties, and all the shows and marketing dedicated to this style, there is increased competition in this sector. Thus margins are driven down, and profits slimmer. In the multifamily arena, most investors have a limiting belief that it is too difficult and costly to buy an apartment complex and thus never enter the field.