Understanding the difference between multifamily investing and single family investing is a key part to obtaining true wealth in real estate. Furthermore, understanding the pros and cons of investing in each of them is really going to help you make some crucial decisions. Let’s get right into it.
Which is more recession resistant?
In the 2008 crash, do you really know who lost all of their money? It was the single family investors NOT the multifamily investors! In fact, multifamily real estate reacted better than almost any other asset class during the 2008 crash. Keep in mind, that during a recession, people are losing jobs, and as a result, less people are buying homes. Lucky for us as real estate investors, whether people are buying homes or not, people always (and will always) need a place to live, so demand for rental markets almost always increases during these recessions- this is great for multifamily asset values. On the other hand, single family real estate values dropped by as much as 50% in some markets, and many single family investors lost their shirts during these times. Right now, similar to 2006, real estate values are as high as they’ve ever been, and it wouldn’t be illogical to think that many of the same issues that occured back then are going to occur again. Would you rather invest in an asset that did well during the last recession, or did poorly? The choice is yours.
How about Economies of Scale?
There are a lot of reasons why investors move from single family investing to multifamily investing, and economies of scale is no exception. Would it be easier to find 100 separate deals, analyze them, underwrite them, negotiate them, find financing for them, and manage them, or would it be easier to purchase a 100 unit apartment complex? The answer is obvious, and it is because of this that multifamily investing is so powerful in terms of scaling your business. You will have more units, more quickly, and you will be more profitable. Furthermore, let’s think about this from a different perspective. Think about the operator, or sponsor that you will be investing with if you passively invest in a larger deal. Do you think he or she will be more experienced than a single family investor? Absolutely! So investing in their deals is giving you access to their experience, and their team. What about hiring a property manager? Imagine having to hire different property managers, in different zip codes, and having to pay them a premium… When hiring a single family investor, the average management fee that you will be charged is 8-10%- when hiring one for a multifamily property, expect to pay more like 4-6%- not to mention that, if necessary, a larger property will even allow you to pay for an onsite manager. This means that your tenants will be better taken care of, and that your tenants will have a personal relationship with your manager. You can’t beat that as an investor.
What about maintenance requests?
Many investors in 2008 went out of business due to the various maintenance requests that they had to deal with amongst their numerous spread out properties. Think about it: You have two toilets that have clogged on any given day. Either you or your contractor has to drive to the property, look at the materials that they need, drive to Home Depot or Lowes, purchase the materials, and drive back to make the repair. Think about it, they’ll be a few hours in by the time they are finished with the first repair! With multifamily investing, your onsite manager, or property manager, will be able to handle many requests at a time, as all maintenance requests will be in the same building. This allows for more efficient, cheaper, and less stressful maintenance management, which as a result means more money in your pocket as an investor. Think these maintenance requests aren’t a big deal? Don’t be fooled- these kinds of expenses CERTAINLY add up.
How is each one valued? Forced appreciation?
The fact is, single family properties are valued completely differently from multifamily real estate. Single family properties are valued based on what comps in the area have sold for. On the other hand, multifamily property is valued based on the income that it generates. This is a very powerful distinction! Allow me to explain: If you have a 100 unit apartment complex and each unit is generating rents of $800, the market rents in the area are $900, and the market cap rate is 6%. You purchase the asset, and raise the rents of each unit by a small amount of $100. Guess what, you have just raised the value of your asset by $166,000! And this is just the beginning. What if you purchased a distressed asset with current rents at $600? What if it’s even lower than that? The possibilities of raising value to multi family real estate are endless, and it’s all because multifamily real estate is valued based on the income that it produces. With single family, you are limited to the price that comps in the area have sold for. With multifamily real estate, there are DOZENS of ways to add value. Can you include washers and dryers for your tenants? Can you separately meter the units and put the utilities in your tenants name? Can you simply raise rents because rents are below the market rate? You can be as creative as you’d like in this business!
Syndications?
Would you rather have a $2M asset appreciate in value, or a $200,000 asset? The answer is obvious, and this is one of the benefits of investing in multifamily real estate. In multifamily, sponsors can utilize syndications to purchase these large investment deals, in other words, they can bring multiple investors together to purchase a larger deal. With larger numbers, come larger profits. The asset will be worth more, so it will appreciate more in value. With rental increases, you are now increasing the rents of one hundred doors rather than one door. When conducting your cap ex repairs, you only have one roof, and one utility room for your 100 units, rather than 100 separate roofs. As you can see, there is true value in utilizing syndication to purchase larger deals, and through multifamily real estate this becomes possible. Not to mention the headache of going through purchasing 100 different assets. Multifamily real estate is just far more efficient.
In between investments?
The reality is, you are not always going to have the money to invest in the larger deals. Maybe you will, but for most there will be months, and sometimes years in between your investments. In my opinion, this is a perfect time to invest in single family real estate. If you are looking for some place to park your money in between your investments, I would strongly prefer to invest this money into single family homes rather than leaving it in the bank to receive a half of a percent in interest. Additionally, single family investing might be a great way for you to get your feet wet and learn about the business. If multifamily investing is too intimidating for you at first, then start smaller (or just fight through your fear!). Don’t be ashamed in building your wealth slowly but surely. However, if you are ready to take massive action, and you are wanting to scale your profits and your business quickly, without question multifamily investing is the better option for you. To each their own.
Keep this information in mind when making your next investment decisions. Multifamily real estate investing gives you a lot of leverage that single family investing simply doesn’t offer. Especially during these uncertain times, with multifamily real estate being a much better recession resistant investment, considering investing in these lucrative assets is a no brainer. Check out the “Invest with James Gleeson” tab if you want to get involved in the exciting business of multifamily real estate. We’ll be happy to answer any questions that you have, and we are constantly finding great value add multifamily opportunities. Stay safe out there- Happy investing!