As a real estate investor, it is important to step out of your comfort zone every now and then. This doesn’t mean you need to shift niches every six months, but you shouldn’t stay content either. One of the fastest ways to accelerate your real estate holdings is with multifamily properties. On the surface, adding an extra unit, or two, may seem overwhelming and something you don’t want any part of. If dealing with one tenant is difficult, dealing with three must be a nightmare, right? The reality is that extra units are much fewer headaches than you would think.
Don’t be scared off by what you may have heard from a fellow investor or someone else in the business. With the right management, multifamily properties can instantly change your portfolio for the better. Here are five reasons to invest in multifamily properties.
- Increased Cash Flow: There is nothing wrong with single family rentals. They are a great way to break into the business and get your feet wet in real estate. However, most single-family rentals are capped in their potential. There is only so much cash flow you can squeeze from an individual unit. However, when you add another one to three units the complexion of the property changes. One of the greatest benefits with additional units is the increased cash flow. Instead of netting a few hundred on a single-family rental, you can triple your cash flow with extra units. That cash flow can be used to pay down the mortgage, pay off debt or simply be put in savings to reinvest at the right time. The level of management doesn’t necessary change with the extra units, but the cash flow will increase.
- Ease Of Management: As we stated, the prospect of extra tenants and extra units is often the biggest reason investors shy away from multifamily properties. Sure, with bad tenants this can be a legitimate burden. However, it is important to keep in mind that having a three-unit property is not the same as owning three individual properties. Instead of having to travel to three properties, everything with a multifamily is under the same roof. If there is an issue with two of your tenants, you can deal with it concurrently. This is also an important consideration when thinking about improvements and repairs. You only need to fix one roof, not three. There is usually only one furnace, one basement and one attic. If the lawn needs to be mowed, there is only one yard. If the driveway needs plowing, there is one driveway. In many ways, this actually makes management much easier than anticipated. Sure, tenant issues can pop up at any time, but having everything in one physical location makes management as easy as possible.
- Security: It is amazing to think about how many investors think of multifamily properties as risky investments. The truth is that multifamily properties are the complete opposite. With one single family rental you have all your eggs in one basket. If your tenant can’t pay their rent one month you have nothing else coming in for the property. You will be forced to pull capital from other accounts to cover the mortgage and hope the issue is only short term. With extra units comes extra security. On a three-family property you have three rent sources. If one stops paying, it certainly isn’t ideal, but you still have the other two units of rent. This can help defer the amount of money you need on the property. If two units stop paying, which would be extremely rare, there is still one unit of rent coming in. For as much as investors think that multifamily rentals are risky, the opposite is actually the case.
- Appreciation Potential: The key to any investment is upside. In the real estate world your property value is based on other real estate in the area. If property is selling at a certain price point it is difficult to generate value without making improvements. This is certainly the case with single family rentals. However, with additional units there is a higher future appreciation potential. With consistent rents coming in there is value that goes beyond comparable sales. You have a documented rent roll where you can show the income potential of the property. This gives you the ability to aim a little bit higher when it comes time to sell. Worst case you can use your property to cash out equity or add a second mortgage, which can open further investing opportunities.
- Decreased Competition: For all the reasons we already mentioned there is a negative perception around multifamily properties. This can be used to your advantage. With decreased interest there is also decreased competition. Instead of ten investors in your market fighting for the same single-family rehab, there may only be a handful interested in a four-family property. This not only allows you to get more deals, but often get them at a price point you are comfortable with.
Like any other investment there will be some properties and markets that are not for you. However, you should still investigate them and do your due diligence. The same is the case with multifamily properties. Don’t blindly ignore any property solely based on the number of units. Multifamily properties can give your portfolio the jolt you have been looking for.