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In this article I will cover the 6 main reasons that I choose to invest in multifamily rather than single family rentals.
When you invest in SFRs you may see roughly $200/month in free cash flow when you take in your rents and cover all of your costs. Well, the same math works in multifamily. For my portfolio, I generally average $200-250 per unit in free cash flow. There are exceptions to the $200/month in single family but the same is true for multifamily. Even if single family does perform better on a cash flow basis there are still lots of reasons to choose multifamily instead.
Why I Choose Multifamily
- Valuation Approach
- Easier Lending
- Easier to Manage
- Safer and More Consistent
You can buy 50-100 units with one transaction as opposed to 1 transaction / house. How long would it take you to buy 10 houses? A realistic timeline would be 5 to 10 years for some but even if you were to somehow do it in one year you are likely going to go through the loan process 10 different times.
With multifamily I can buy 20 or 50 or even over 100 units in one transaction. How much easier is that? One credit pull, one time to submit all of your documents to the lender and one closing!!!
If you have a fairly large portfolio of single family rentals, say 10, you are either managing them all yourself or paying a management company roughly 10% of the rent to manage them for you. While 10% doesn’t sound that bad you have to look at it properly. If your rent is $1000/month and you are paying someone 10% of that to manage it for you then you are effectively paying them 3-5 months of your profit to handle it, OUCH!!
Average profit on that $1,000 rent would be about $200/month or $2,400 per year in most markets. If you are paying someone 10% of the rent to manage it for you then that is $1,200 for the year which is 6 months profit or half of your annual profit.
With a 40-50 unit you should be able to afford a part-time manager to handle it for you which is part of your operating budget for the property. At the end of the month your profit is yours as your payroll (management) was covered in the expenses in the monthly budget before your profit.
The scale of multifamily allowed me to hire someone to handle the day-to-day operations of the business freeing me up to find the next deal and meet the next potential investor.
Valuation of the Asset
When you buy commercial real estate/multifamily your value is based upon the profit of the property, unlike single family which is valued on a comparable sales (comp) basis.
When you buy or sell a single family home, either as an investment property or your personal residence, the value is set by looking at what other similar properties in the neighborhood have sold for. This establishes the value of your home. There will be slight variance at times but this is basically how your value is set.
Multifamily, on the other hand, is valued based on it’s profitability or the Income approach. The higher the profit the higher the value. This is because multifamily is seen as a business and is thus valued on the amount of profit or free cash flow it will generate.
As you can gather, this leads to tremendously larger upside in multifamily. If my property is 50% more profitable than the same size, type and age property owned by my competitor across the street then my property is worth 50% more.
Lending is Much Easier in Multifamily
For single family, the basics are that you will need to keep your DTI (debt-to-income) in line each time you purchase a house. Additionally, if you are self employed, good luck trying to get a mortgage at all. The lender is going to want to see W2 income and your DTI as a rule will need to be roughly 43%. This isn’t the case with multifamily.
The beauty of multifamily is that you are buying commercial real estate or basically purchasing a business. When you buy commercial real estate your lender will provide a loan based in large part on the properties ability to pay or cover it’s own debt service (principal and interest). The higher the profit from the property the more loan they are willing to provide up to about 80% in today’s market.
To illustrate this point, I paid all cash for my personal residence in 2010 because I was following the dogma of debt being evil. Once I got myself educated in commercial real estate I realized that I should not have paid cash and went to my bank to take out an 80% loan on the property that I owned free and clear. The banker basically laughed at me because I didn’t have a job (I had retired the previous year). My only option to unlock all of that “dead” equity in my house was to sell and move into a rental myself.
Nine months later I bought my first apartment complex for 1.6mm dollars with a shiny new loan of $1,137,000, still with no “JOB”!!
Easier to Manage
Compare two different real estate portfolios; one consisting of 5 single family rentals and one with a 100 unit apartment complex. For the person with 5 single family properties they will likely be driving all over town to manage the showings, maintenance, inspections, etc… Do you see how you have just bought yourself a JOB?!
The Investor that has the 100 unit apartment complex has all 100 units under one roof that doesn’t require moving around the city to manage it.
Safer and More Consistent
If you own a couple of houses and have one vacancy you are 50% vacant which chops your income and potential profit in half until you get it re-leased. With 100 units, 10 vacant still leaves 90 contributing rent and profit.
Also, think of owning a single family rent home and the water heater gives out. That is easily $800-1,000 which could easily wipe out another three to five months worth of profit. In multifamily I assume and know that things are going to break or wear out and have budgeted for it.
I can hear many of you now
But Bruce, I don’t have the money or know how to invest in multifamily. Remember when you bought your first rent house, you didn’t really know what you were doing then either but you learned what you needed to and now are proficient. The same will happen in multifamily if you are open to learning and breaking out of your comfort zone to follow a proven path.
When you combine the benefits of multifamily investing with the ability to raise money you would be amazed at how different things can be for you and your family.
A quick, no risk offer for you to help scale your business exponentially.
If you are interested in seeing how you can invest in multifamily with other people’s money alongside your own to grow your existing real estate business exponentially, check out my course on Syndications at: https://streetversity.com/intro1/.
If you don’t feel the course provided you with actionable and practical information to take your real estate business to the next level I will gladly return your entire purchase at any time with no questions asked. It’s my conviction in the value of the offer.
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Known in the real estate world as the Apt-Guy℠, 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 a #1 Best Selling Author and has received local and national recognition for his syndication efforts. He was the recipient of the Austin Apartment Association’s Independent Rental Owner of the Year for 2016 and the National Apartment Association’s Independent Rental Owner of the Year for 2017. In addition to being a TV personality and public speaker, Bruce is also an educator with a focus in multifamily investing and syndicating.