There are many reasons to invest in multifamily real estate as opposed to single family; primarily the fact that you can save yourself a lot of headaches. It’s scalable, it has efficiencies that single family investing lacks, and you can achieve your goals with less deals and less work. I am not against investing in single family homes – that’s how I got my start – but I have come to realize over the course of my journey that I can make a much bigger financial impact in a shorter amount of time by investing in multifamily.
Let’s start out with why multifamily is the better path to take:
- As I mentioned before, multifamily is more scalable.
With one large commercial multifamily deal you can build in the systems to run your portfolio from the start. You can have onsite property managers and full-time maintenance staff from day one. When you start with single family homes it takes time to build your portfolio door by door to reach the point where you can include those items into the operation.
- Multifamily is more efficient.
Imagine a 100-unit apartment complex. This apartment building (ideally) has the same HVAC units and the same hot water heaters for each unit, as well as one roof covering all of those units. The full-time maintenance staff knows how to fix each item because they are all the same and each repair is done onsite with no travel time. On top of that, they can store extra parts and equipment on-site. This is economies of scale at place – the more units, the less cost per unit to maintain.
Now imagine 100 single family homes. Those homes will have a wide range of different HVAC units and hot water heaters, as well as 100 different roofs all with their own respective ages and conditions. Every time a repair is needed, your maintenance staff will have to travel to each respective property, diagnose the issue, and if they don’t have what they need they will have to make a trip to Lowe’s and back to finish the job. That’s extra time and travel expense for each repair.
Issues like these are easy to delineate between the two asset types. The expense ratio is almost always less for a portfolio of apartment units compared to that of a portfolio of single-family homes. That adds up to real money and real time saved.
- It takes less time and effort to build up your portfolio.
Closing an apartment deal does not take much more effort than closing a single-family home or small multifamily property. I realized this on one of my previous BRRRR deals on a 2-unit. I went through the whole process of finding the deal, negotiating with the seller, going through due diligence, securing financing, raising private money, closing, executing the rehab, securing the refinance, and getting the property rented. And let me tell you, that was a lot of work. I basically completed every step required to execute a commercial multifamily deal but came out with only two units. That being said, I’m glad I did it because of what I learned along the way.
However, the purpose of sharing this information is so that you can learn from me and others who have done it before to make the realization before you jump in. You can go straight to multifamily – or you can start with a smaller property and execute the “stack”. The “stack” is a strategy where with every deal you double down your efforts. In other words, you close on a single-family house, and then a duplex, then a fourplex, and then jump into the commercial world with an 8-plex, and you keep the process going. The kicker is that once you go through the process with one, taking the next leap is so much easier!
The key is to jump in wherever you feel comfortable enough to act yet push yourself enough to grow. So, if you are comfortable with starting with a duplex, do it! If you start with a commercial deal, more power to you! You will quickly discover that each step is not that much more difficult than the last, so if you skip the smaller properties altogether you can reach your goals faster and spend more time doing what you love, which is probably what attracts you to invest in real estate in the first place.
With all that said, is now a good time to invest in multifamily real estate? I believe the old saying, “Don’t wait to buy real estate, buy real estate and wait” sums it up perfectly.
Yes multifamily as an asset class is very competitive with low supply right now, but that just means you have to be a touch more selective and stick on your buying criteria. I won’t ever advise buying a bad deal just to get started but also advise against extreme caution because there are always going to be doubts and uncertainties. Don’t let your fear keep you from taking action. Instead, let your fear drive you to act. Be fearful that you will let good opportunities pass you by due to not acting. Be fearful that you won’t reach your goals because you listen to others say, “the market is at its peak and it’s a bad time to buy”. If you have strict standards and underwrite your deals conservatively and you hunt good deals like a Tiger stocks its prey through the bushes, ready to pounce on a good deal, you can find success in any market cycle.
Let’s break down why now is a good time to invest in multifamily:
- Interest rates are low.
I’ll go one step further and say interest rates are at all time lows! Money is cheaper than its ever been and banks want – NEED – to lend money. For example, I just refinanced a 2 unit home I bought with a VA loan to 2.75% interest over 30 years with no money out of pocket and my loan amount only increased by $2,000. In other words I traded $2,000 in equity for $100/month more in cash flow which will be a payback period of 20 months. And the lender included the option to skip a payment with no additional charge. So that’s an extra $1,000 (the mortgage payment) that can be put in the reserves account or used to improve the property now. The point is that my lender is not the only one out there offer things like this.
Fannie Mae just came out with a new small balance loan package that is now non-recourse! This means you don’t have to be liable for the debt and it won’t show on your credit. This is big for multifamily investors looking for medium sized buildings under 50 units or so. You can now get non-recourse debt. Lenders are incentivizing borrowing to get money flowing through the economy. By knowing the rules of the game and realizing this opportunity you can get in now and lock in extremely low rates.
- Money is everywhere.
Every geek on the street wants to get into real estate right now because they have likely experienced the volatility of the stock market first hand when they lost 33% in March, then it came back up, and then it went back down again. People want there money in safe, consistent asset classes that still perform well. Find me an asset class that fits that bill better than commercial multifamily. Trades are still happening at all time highs and people want in. The money is usually the easiest part if you shift your thinking and find good deals. Start having the conversations now while consumer sentiment is still high so that you can capitalize on the amount of money that wants and needs placed in better assets like multifamily.
- Some big buyers are sitting on the sidelines due to covid.
I would almost argue my own point here because competition in multifamily appears to be at an all-time high, but from less experienced operators. Once you start underwriting deals and see random C class properties trade at 3 caps you will see what I mean. However, some of the bigger institutional and even large groups are buying their time and not buying multifamily assets right now. They are sitting on the sidelines waiting to see how things play out before they place their capital. They can afford to do this because they already have a track record, are established, and have performing assets.
As someone trying to get started, I would suggest this is not a time to follow the pros because this is your opportunity to get out there and make it happen. Diligently and conservatively underwrite your deals, add in more for reserves, and plan for the worst. If a deal still works with that in mind – go get it! This is a time to grind and make opportunity. Ask yourself, “Where will waiting get me?”. The answer is the same place you are in now but only later on… wasted time. When you have less competition, you have the advantage; so go make offers!
Investing in multifamily properties can set you on your way to financial freedom because its scalable, efficient, and you can achieve bigger results faster. Now is the time to get started because interest rates are so low, private equity is abundant, and there is increased opportunity with less competition from big time buyers. This is the asset class you want to be in for true passivity, and there is no better time than now. Don’t hesitate, be brave, and surround yourself with the right people to make it happen because when you look back in 20 years you will be glad you did.