Switching from single-family investment to apartment investment
Many real estate investors choose to own multiple single-family rentals (SFRs) instead of investing in multi-family properties or apartments. While the point of view is that the single family is simpler; in many ways, the multi-family makes more sense.
When you invest in LICOs, you can see around $ 200 / month of cash flow as you collect your rents and cover your costs. Well, the same calculations work in multi-family. For my portfolio, I typically have an average of $ 200-250 per unit of cash flow. There are exceptions to the $ 200 / month in single-family families, but the same is true for multi-family. Even though single-family families fare better in terms of cash flow, there are many reasons to switch to multi-family.
You can buy 50 to 100 units in a single transaction instead of one transaction per house. How long would it take you to buy 10 houses? A realistic time frame would be 5-10 years for some, but even if you were to somehow do it in a year, you will likely go through the loan process 10 different times.
When you invest in multi-family properties, you can buy 20, 50 or even more than 100 units in one transaction. Is it much easier? A single credit application, once to submit all your documents to the lender and a single closing!
If you have a large portfolio of single-family rentals (say 10), you either manage them all yourself or pay a management company around 10% of the rent to manage them for you. While 10 percent doesn’t sound like a lot, you have to consider that the average profit on a rent of $ 1,000 would be around $ 200 / month or $ 2,400 per year in most markets. If you pay someone 10 percent of the rent to manage it for you, that’s $ 1,200 for the year, which is six months of profit or half of your annual profit.
With a 40-50 unit, you should be able to afford a part-time manager to manage it for you, which is part of your operating budget for the property. At the end of the month, your profit is yours because your payroll (management) has been covered in the expenses of the monthly budget.
The breadth of multi-family has allowed me to hire someone to run the day-to-day operations of the business, freeing me up to find the next deal and meet the next potential investor.
3. Asset valuation
When you buy commercial / multi-family real estate, your value is based on the profit from the property, unlike a single-family home, which is valued on a comparable sales basis.
When you buy or sell a single-family home, whether as an investment property or your personal residence, the value is determined by looking at the selling price of other similar properties in the neighborhood. This establishes the value of your home.
The multifamily, on the other hand, is valued according to its profitability or the income approach. The higher the profit, the higher the value. This is because the multifamily is considered a business and is therefore valued based on the amount of profit or cash flow it will generate.
This leads to a considerably larger rise in the multi-family. If my property is 50 percent more profitable than the same size, type, and age of property owned by my competitor across the street, then my property is worth 50 percent more.
4. The loan is much easier in the multifamily
For single-family families, the basics are that you will need to keep your DTI (Debt-Income) online every time you buy a home. Also, if you are self-employed, it can be more difficult to get a mortgage. The lender will want to see W2 income and your DTI typically will need to be around 43%.
When you buy commercial real estate, your lender gives you a loan based largely on the property’s ability to pay or service its own debt (principal and interest). The higher the profit from the property, the higher the loan they are willing to provide, up to around 80% in today’s market.
To illustrate this point, I paid cash for my personal residence in 2010 because I followed the “debt is evil” dogma. After I graduated from commercial real estate, I realized that I shouldn’t have paid cash and should have gone to my bank to take out an 80% loan on the property that I owned for free. The banker basically laughed at me because I didn’t have a job (I had retired the year before). My only option to unlock all that “dead” equity in my home was to sell and move into a rental myself. Nine months later I bought my first apartment complex for $ 1.6M with a brand new loan of $ 1,137,000 and still unemployed!
5. Easier to manage
Compare two different real estate portfolios, one consisting of five single-family rental units and the other of a 100-unit apartment complex. For the owner of five single-family homes, they will likely travel across town to handle visits, maintenance, inspections, etc. This investor has just bought a JOB!
The investor who owns the 100 unit apartment complex has all 100 units under one roof, which does not require moving around the city to manage it.
6. Safer and more consistent
If you own a few homes and have a vacant unit, you’re 50% vacant, which cuts your income and potential profits in half until you re-rent it. With 100 units, 10 vacant leaves another 90 which contribute to rent and profit.
Many opponents argue that they do not have the money or the know-how to invest in multi-family housing.
Remember when you bought your first rental home? You didn’t really know what you were doing then either, but you learned what you needed and now you are proficient. The same will happen in the multi-family if you are open to learning and stepping out of your comfort zone to follow a proven path. When you combine the benefits of multi-family investing with the ability to raise funds, you’d be amazed at how different things can be for you and your family.
Known in the real estate world as Apt-GuySM, Bruce Petersen is a serial syndicator who started with a 48 unit building and has now syndicated over 1,100 units. As the Founder and CEO of Bluebonnet Asset Manager LLC and Bluebonnet Commercial Management, Bruce is one of the best-selling authors and has received local and national recognition for his syndication efforts. He received the Austin Apartment Association Independent Rental Owner of the Year award for 2016 and the National Apartment Association Independent Rental Owner of the Year for 2017. In addition to being a TV personality and a A public speaker, Bruce is also an educator specializing in multi-family investing and syndication.