For the growth-oriented investor, it’s a no-brainer. Why buy ten individual houses and source ten individual insurance policies, utility providers, and ten different loans? Wouldn’t it be easier and less of a headache to close one transaction on a ten or even a 100-unit property?
It is. And it’s even more lucrative.
Valuation.
In my opinion, this is the most convincing reason to invest in multifamily assets. Properties of 5 or more units are valued specifically by the net income they generate. This is important because you can force appreciation by increasing the asset’s net income. This is done by increasing rents, decreasing expenses, or a combination of both to achieve a higher net income.
Example: On a 16-unit property I own, we updated unit interiors which then enabled us to charge higher rents. On average, we increased rent by $200 per unit which increased our annual net income by $38,000. If our property is valued at a 6% capitalization rate, we have increased the value of our property by $633,000 (38,000/0.06).
Vacancy.
The most important issue when comparing multifamily and single-family vacancy is a recession. During an economic downturn, people start cutting costs. They move out of their luxury condos and into slightly older and cheaper apartments. The same is true for tenants renting single family homes (SFH). Renters will cut costs by moving into smaller, less expensive apartments. This increases the demand for B and C class multifamily assets and decreases vacancy while SFH owners will see a massive increase in vacancy as tenants move into cheaper housing.
Furthermore, one vacancy in a SFH drops your gross income to zero and can wipe out any cash flow reserves quickly. One vacancy per month in a 10-unit property leaves you with 90% occupancy and cash in your pocket every month.
Economies of Scale.
Simply put, the more units the less it costs to operate. A property management company typically charges 10% of gross income to manage a SFH. Management of a multifamily asset ranges from 4-8% depending on number of units. Multifamily owners will also realize increased savings on repairs by eliminating service call fees by having onsite maintenance on the payroll.
Debt.
Even the debt used to finance a multifamily asset has several benefits over SFHs. Most multifamily loans are non-recourse which means if a buyer were to default, the bank would foreclose on the financed property but all of the owner’s personal assets would be safe. These loans also come with higher leverage (up to 80% loan-to-value), interest-only terms, and no debt-to-income (DTI) requirements. This is because the bank cares more about the ability of the property to pay off the debt rather than the borrower.
Okay, buying a million-dollar asset might be a bit daunting for some. You might not even qualify or have enough funds to cover the down payment. I’m here to tell you it can be done. I realized early on that multifamily assets were the superior investment. After I sold my first single family investment property I immediately rolled that money into my first multifamily.
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