Your friend Charlie approaches you asking for some advice: He has $50,000 he is looking to invest and he has the following two options:
- He found a single family home for $200,000, and he found a bank to finance $150,000, meaning he only needs his $50,000 to close on a $200,000 asset.
- His uncle, Larry, is a capital raiser who puts together large multifamily deals and raises the funds from his family and friends. He is allowing $50K investments into his newest deal, a 175 unit apartment complex in Atlanta, GA.
If I was advising Charlie in real life, I would tell him to choose option B. But wait, that doesn’t mean I am right. This is just my humble opinion.
Why is Multifamily real estate “better” than single family?
While this argument can go on back and forth, and some people have done extremely well investing in Single family homes, i believe there are a few main points that will highlight the potential pitfalls of single family investing and the great benefits of Multifamily investing
- Single family homes don’t have multiple tenants
-While this seems obvious, I want to clarify my point: If you have a single family rented to a nice tenant, and that tenant ultimately moves out, your occupancy goes from 100% to ZERO. Just like that. Not income producing like it once did. If you are not prepared with cash reserves, you risk losing all cash flow you’ve made while covering the mortgage payments your tenant one did. On the other hand, if you have a multifamily property, say 25 units, and even 3 tenants move out, your occupancy goes from 100% to 88%, likely still enough to cover all expenses for that month or two while you work on re-renting the apartments.
- Economies of scale are more advantageous in larger multifamily
When you own a single home in a neighborhood, if you plan on hiring an outside management company to operate your investments, you will likely pay a higher monthly rate to have them manage this home as opposed to bringing management in-house (your own personal manager) if you had a larger pretty where the income can support the salary of a full-time manager for your own property.
- Less emotion involved in multifamily acquisitions
When searching for a Single family home to buy as an investment, you run into too many emotional buyers. The reason is that many people who are buying these homes aren’t looking at this from a numbers perspective, but as a place to live. Given people are naturally emotional creatures, we tend to get emotionally in those charming features of our dream home. When you are looking for an investment, you are strictly looking at the numbers and will often be outbid by overpaying, emotionally attached first time home buyers looking for that forever home.
If you have any questions or comments, or maybe just want to politely disagree, please feel free to reach out: Jason@3pillarsrei.com