With so many different types of real estate there are many different options for us as investors. Besides the multifamily apartments and single family part of the residential side of real estate you could also invest in office space, self storage, medical buildings, the list goes on. We decided a long time ago to focus on the residential space, and not just anything – multifamily apartment buildings. This wasn't an accident, let's compare some of the major talking points of multifamily with single family and discuss why we think that multifamily is the best investment option out there.
At its core multifamily apartments are a block of apartments or as we tend to call them units. Each of these can be inhabited by a person or family, the more units the more people are paying for the expenses of the property. Compare this to a single family home where there is only one space for a person or family and only one person paying the rent for the property. An apartment building is classified as 5 or more units, so at minimum we have 5 different tenants paying rent which pays for the expenses of the property. The more units the higher the expenses but also the more people we have paying down our expenses. Typically the ratio of income to expenses stays around 50% despite the size of the property. This also gives us the advantage of (generally) higher rental collections.
An easy example of this is if you have a single family home which you are renting for $1,000 a month. The rent isn't collected this month, either the property is vacant or the tenant didn't pay. This means that your economic occupancy is 0%.
Collected Rents / Gross Scheduled Rents x 100 = Economic Occupancy
$0 / $1,000 x 100 = 0%
But let's say we have an apartment building of 50 units and for easy math each of these rent for the same $1,000 a month. That means our Gross Scheduled Rent for the month is $50,000. In this example let's assume that 4 units either didn't pay this month's rent or the units are vacant, we collected $46,000 in rent this month. This gives us an economic occupancy of 92%.
$46,000 / $50,000 x 100 = 92%
Through comparing single and multifamily you can see that with multifamily apartments you can have quite a few of your units rent unpaid and still have a good overall economic occupancy and collections with the ability to pay your expenses and probably have money left over for you and your investors.
Ease of Management
With multifamily it is much easier to get a great 3rd party manager than with single family. This is partly because there is more money in multifamily so there are more management companies doing the work. There are also many more systems in place in terms of management software to make it even easier for managers as well. Not only are there more management options but management is normally cheaper too, this falls under the economies of scale concept that we will get into later.
Forced Appreciation and Increasing Value
Forced appreciation is the ability to increase the value of your property through strategic or accidental actions made by the investor. In a single family home, or any multi unit property under 5 units this is a little tricky to do. Although you can update the property and increase the value, generally these types of properties are valued based on sales comparables in the area. This means that if a single family 3 bedroom 2 bathroom sells for $450,000 down the street, your 3 bed 2 bath is most likely worth a similar amount as long as it is in similar shape.
This differs from multifamily apartments where the value of the asset is based on its net operating income (NOI) and the capitalization rate (cap rate). Because the assets value is based on its income we can strategically increase the rents throughout the property. This is done by implementing small “nuisance” increases (typically a $15-$25 rental increase at the beginning of the lease term), adding fees or increasing rents for new tenants. Many times additional fees can be put in place that add to the bottom line (see Additional Streams of Income below). Something we always look for in properties are value add components, these are certain things that we know we can complete even before the purchase that will allow us to increase the property’s value. This can include upgrading units with items like new floors, new paint, fixtures and the like. It could be fixing management issues, adding curb appeal with a multitude of other things as well. Doing this allows us to increase the income which increases the overall value of the asset and in turn the equity that we have in the asset. Once this is completed it's not uncommon to be able to refinance or take out a supplemental loan in order to utilize that newfound equity of the property.
Economies of Scale
This is the proportionate savings gained by increasing the number of units owned. This same idea can be done by purchasing multiple single family homes close to one another or can be done by purchasing a single apartment building, or even multiple apartment buildings in a city.
Consider lawn maintenance, this will need to be completed in almost every situation. Every time a lawn contractor goes out to a job they need to do the same things - load the truck, fill the equipment with gas, drive over, unload, do the work, load the truck back up and head back to the office or next job. With an apartment building you may have a larger plot of land being manicured but it doesn't take that much more time because of all of the non paid things that the contractor still has to do - driving over, adding gas, etc. You will still pay more than a smaller yard but the bang for your buck will be greater.
This tends to be true with all types of contractors, when you have multiple units in close proximity (ideally the same complex) this makes it easier for contractors to complete jobs quicker and easier. This ease of the job then gets transferred to you in terms of a better deal when getting the job done.
Additional Streams of Income
With apartment buildings there are many more opportunities for additional income streams. Again, although not all of these things are solely achievable with multifamily, some are and many are easier to implement. Some things include:
- Late fees
- Application fees
- Pet fees and rent
- Laundry rooms
- Water fees
- RUBS (Ratio Utility Billing System)
- Rent storage space
- Rent garages or carports
- Short term rentals (this doesn't necessarily mean AirBnb types, I mean: month to month or 6 month, etc)
- Add additional amenities (fitness center, dog park, etc)
- Work out a deal with internet and cable providers
- Add vending machines
Large Pool of Qualified Buyers
You might think a lot of people want to buy your single family home but the amount of people that want to buy multifamily buildings is also large. This is especially true with higher end complexes in nice areas. High quality assets can sometimes be sold to funds like REITS and institutional buyers for large profits. Many times these funds are willing to pay top dollar for high quality assets to add to their portfolios because they know the value will be there for years to come. There is also a growing number of syndicators and high net worth individuals looking to diversify funds from the stock market, many into multifamily apartments.
Great Leverage and Financing
Although SFHs have many options too, there are interesting options in multifamily. You can't finance everything but you can finance most multifamily because it is such a great asset. There are many different strategies, even if you don't have a ton of money you can bring in a partner that does. Depending on the type and location of the asset you can get fantastic leverage on the property. There are instances that you can get 75% or even 80% LTV (loan to value)! With many loan packages, like Fannie Mae and Freddie Mac you can even get a non-recourse loan so that you are not personally liable if on the off chance things did not go as expected, this not something you can do with a single family home.
Those are just some of the reasons we prefer multifamily apartments over single family. There are other reasons too and of course there are plenty of positive things regarding single family as well. For us these differences are too hard to ignore and make multifamily apartments the asset of choice. Let me know what your favorite part of multifamily is!