Why We Chose Multifamily Instead of Single-Family

By Harvest Properties Group on October 1, 2020
Real Estate investing comes in many forms. Apartments(aka- Multifamily(MF)), Sing […]

Real Estate investing comes in many forms. Apartments(aka- Multifamily(MF)), Sing Family, Self Storage, Mobile Home Parks, Retail(storefronts), Hotels, Land....you name it. There are many, many ways to become invested in real estate. There is often a debate, among active investors, that goes something like "Multifamily or Single Family, which is better?". Honestly, it all depends. We've been involved with both. And even worked on land speculation and development for awhile. But, from our point of view Multifamily makes more sense for our goals. So let's look at both Multi and Single Family options.

A number of people start with Single Family Homes(SFH) because the see them as easier to invest in. Which is a common misconception. From the outside looking in they may be less intimidating but they are a great deal of work for an option that only allows for a single tenant. Most people, new to real estate, see these as easier to manage because you can cut your teeth on one tenant at a time. The truth is that SFH comes with many of the same headaches as MF only with less upside due to the limitations of relying on a single tenant. Think about it. Let's say you have a 10 unit MF property. If you lose one tenant, you still have 9 others paying your mortgage. Yes, your cash flow might take a hit, temporarily, but, if you bought correctly, your expenses are still covered and you are likely still putting some money in your pocket each month. With SFH, if that tenant leaves, you are solely responsible for all expenses with no other tenants in place to cover you. Inn most markets, SFH only cash flow $100-$200 per month. Meaning, if you have an $800 mortgage, just one month of vacancy will set you back at least 4 months of profit. With background checks and unit turnover, between tenants, it will take you at least 30-45 days to fill the vacant SFH. With MF, you have more "wiggle room" when it comes to tenants and expenses.

I mentioned mortgages above. Many new real estate investors believe SFH mortgages are easier to come by. There may be some truth to that but you might be surprised. In many cases lenders are more likely to lend on MF properties because the risk is lower overall. Just look at Fannie Mae and Freddie Mac. For MF they only lend $1MM or more. Why? Because under that amount they see properties as riskier investments. In other words, lenders see the economies of scale as a bonus when it comes to real estate. The more people you have renting your property the more likely you, the owner, are to pay your mortgage. You are less impacted by a single tenant. As we discussed above.

Let's talk expenses. In some MF properties you might have 20 units under one roof. Maybe more. That's 20 rentals paying for that single roof. With SFH it's just the one roof but to get 20 tenants, I need 20 SFH properties. Now I have 20 roofs, 20 different foundations, etc, etc. SFH are harder to scale. In other words, with MF properties, you might have 20 tenants under 2 roofs. Want another 20 tenants? Get one more building(roof). With SFH, you'll need 20 more roofs to accomplish that! It's just more to manage quite honestly.

Speaking of management. A lot of people go into Real Estate investing and assume they will become the property manager. So SFH properties aren't seen as an issue. But, all of a sudden you have 5 SFH properties with 5 different tenants. Because you don't have enough properties to afford a Property Manager(PM), you are the one getting the late night calls, lining up contractors to fix things, searching for tenants, etc. Vacations just became much harder to take. With a MF property it becomes much easier to afford a PM. We've seen the ability to afford a PM, and still put cash in the owner's pocket each month, with as few as 8 units. All under one roof. So, when that water heater breaks at 2 am you, the owner, isn't getting that call. When that tenant skips out, you the owner, aren't responsible for filling that vacancy. There's a monetary value associated with "time". All that "time" you aren't spending on those issues is "time" you can be spending on other things. Like finding that next property!!

What about appreciation? Honestly, most real estate appreciates. Other than a blip in 2008-2010 real estate has traditionally appreciated at a fairly reliable rate. SFH are limited to the amount of appreciation related to area where the property exists. Basically, when you want to sell or refi your SFH property, you are limited to whatever the comps, or similar properties close by, have recently sold for. You really don't have much control over this. Yes, you can renovate and raise the value but by only so much and are limited to what pricing similar properties, in your area, support. With MF you can force appreciation. Because MF is viewed as a "business" by lenders it is valued like a business. Which means that lenders base the value of your MF property off of your Net Operating Income(NOI). NOI is the difference between Income and regular expenses on the property. In a nutshell, if you want to raise the value of your property, and make money in the process, you need to raise income and lower expenses. I admit, I am making that seem easier than it is but it's really not hard. There are many ways to lower expenses and many MF properties have multiple revenue streams. You can raise rents, install washer and dryers then charge for them, charge for storage, charge for WiFi, etc. You can lower expenses by putting in low flow toilets, energy efficient windows, low power lighting, etc. You name it. The options are there.

These are just a few reasons we like to focus on MF and not SFH these days. Forced Appreciation, lowered risk, scalability. They all make MF investing a much easier in the long run. As someone who invests both passively and actively in Real Estate I also prefer to passively invest in MF Real Estate opportunities. For exactly the same reasons! Better chance at larger returns and lowered overall risk. We'll take that combo any day!

Interested in discussing our MF properties, upcoming opportunities or how you can get involved? Let's Chat

Article written by Harvest Properties Group
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