Here’s what you need to know about this aspect of real-estate investment.
When starting their real-estate investing career, most investors initially think about buying a single-family property (whether that’s one home or condo) and renting it out. Most people gravitate towards that because it is conceptually more straightforward. After all, people usually have some level of experience buying and selling property (or, at least, they know someone who does). It feels familiar.
Multifamily, though, is an entirely different story. Few people have experience buying an apartment building, let alone being in charge of one. Plus, initially, multifamily property seems more expensive and more complicated.
Initial appearances can be deceiving, though. How does multifamily vs single-family investing compare? Both have their pros and cons, but usually, over the long-term, multifamily wins. Here’s why and what else you need to know about this aspect of investing in real estate.
Why is multifamily better?
There are a few reasons why multifamily property investments tend to be better: income reliability, quantifiable appreciation metrics, scalability and economies of scale.
The benefit of income reliability is inherent in the property types themselves. As the type denotes, a single-family home is often owned by, well, one single family. If that family can no longer pay their rent or decides to move, your income stream collapses. But you are still on the hook for all the bills. You can’t tell your bank, “The renters didn’t pay so I don’t have to pay you!”
With multifamily properties, just like it is sometimes hard to achieve 0% vacancy all the time, you are equally unlikely to achieve 100% vacancy. Some people will always be renting in the building, which means you will have some income coming in to help cover your expenses. Multifamily units are seldom in a position where the owners have no income to pay their expenses. That makes it a less risky and a more stable investment overall.
Secondly, multifamily real estate has more quantifiable appreciation metrics. Usually, the value of a multifamily building is directly proportional to the income it generates. A building that can provide $1 million income in a year will naturally be quite a bit more valuable than a building that makes $10,000 a year. If you are a multifamily investor, you have the opportunity to force appreciation of a property to increase the income of the asset through operational efficiencies, renovations and marketing strategies to increase the value of the property.
On the other hand, single-family homes are at the mercy of the “comps” of properties within the same neighborhood, general supply and demand and other market conditions completely outside an investor’s control. These are all things that will directly impact your home’s resale value in ways that are tough to quantify.
Investing in multifamily real estate allows investors to grow their portfolios more quickly than with single-family homes. Buying and maintaining 20 single-family houses would be less efficient and profitable than acquiring and operating one 20-unit property. Would you rather have 20 different mortgages and investment strategies or one?
Aren’t multifamily investments prohibitively expensive?
When you think of multifamily buildings, the first ones that might come to your mind are large apartments. These buildings are typically in the millions of dollars, and some of them can even reach the billions.
That’s usually too much to put into one project for individual investors. How, then, are multifamily investments even possible for individuals?
The answer lies in real-estate syndications. When you see an apartment complex or an office complex, there’s a good chance that a group of individuals owns the building. An investment organizer, called a general partner (or syndicator), finds the building, operates it and maintains it. The general partner pitches the investment opportunity to limited partners (or passive investors). These partners don’t have anything to do with the building except to write the initial investment check and collect their monthly distributions and eventual profit when the building sells.
Limited partners can invest as much or as little as the general partner will allow. Most of the time, investment minimums are around $25,000-$50,000. Sometimes they can be higher. Owning a piece of real estate for as little as $50,000 is quite a bit cheaper than buying a single-family home in many places. Therefore, investing in multifamily tends to be more accessible — if done through a real-estate syndication — than buying a standard home or condo.
The one downside to multifamily investing
Of course, there are cons to multifamily investments, as with any investment choice. The biggest downside is the lack of control. When you invest as a limited partner, you get a prospectus and a significant amount of financial detail upfront. However, because the general partner has the final say in the day-to-day operations, you don’t have control over the day-to-day operations, what renovations to make and so forth.
If you want to have complete control over your investment and be able to pick out the exact property you want, choosing a single-family home will give you that. You’ll be able to decide the renovations you go with and when you do them. You’ll be able to choose when to sell or when to hold onto the property. And, you can even set the amount of rent you’re willing to take (or even choose to rent it out as an Airbnb if that works out better).
It’s a little like owning your very own company versus investing in a publicly-traded corporation. You have control when you have a business, but you have many more headwinds against you. When you invest in a large publicly-traded company, you don’t have as much control, but the business leaders presumably have much more expertise navigating the company successfully.
While all investments carry the risk of loss, multifamily, on average, is better. With a single-family home, all your proverbial eggs are in one basket. If that fails, you could lose significantly. Multifamily investments are not without issues, but they don’t have the same volatility in terms of income.
Both are excellent investments, though. No matter which you choose, you should know that real estate has historically been one of the best ways to build wealth. So whatever vehicle is right for you, get started investing for a better future today.
Article by: Feras Moussa