Investing in real estate can be a lucrative way to build wealth, but deciding what to invest in can be a challenge. Many investors (including us) began by investing in single-family homes. As they accrued more properties, they likely implemented a property manager to take over management tasks.
However, even with property management, many single-family home investors find themselves wanting to scale up, or do more investing, but become tired of the work it takes to add these properties to their portfolios. At some point, they inevitably look toward multifamily properties.
While both options have their advantages, there are several compelling reasons to scale up from single-family investing to multifamily investing. In this blog post, we’ll explore those reasons and help you make an informed decision about your investment strategy.
Reason #1: Higher Potential Returns
One of the primary reasons to invest in multifamily properties is the potential for higher returns. Multifamily properties typically generate more rental income than single-family properties because they have multiple units. This means that even if one unit is vacant, there are still other units generating income.
Expenses are also spread out across many units. The costs associated with landscaping or management are less per unit compared to single-family properties, which can mean a higher Net Operating Income (NOI).
Reason #2: Less Risk
Investing in multifamily properties can also be less risky than investing in single-family properties. With single-family properties, if the tenant moves out, the property is vacant, and the investor is responsible for covering all expenses, including the mortgage, until a new tenant is found. If you’ve invested in single-family properties, this has probably happened to you before (it has to us).
With multifamily properties, however, the risk is spread across multiple units. If one tenant moves out, the investor is still generating income from the other units.
Additionally, multifamily properties can be less susceptible to fluctuations in the housing market. While single-family properties may be affected by changes in the local housing market, multifamily properties are influenced more by the local rental market, which tends to be more stable.
Your risk as a passive investor is also less. You enter the team as a limited partner, which means you have limited liability if anything were to happen at the property. You also aren’t responsible for the loan, which is another huge reduction in risk (more about that under #4). Be sure to read your legal documents carefully and speak with your attorney to fully understand your liability risks.
Reason #3: Greater Control
Investing in multifamily properties can also provide greater control over the investment. With single-family properties, the investor is at the mercy of the local housing market. If property values decline, there’s not much the investor can do other than wait for the market to improve. This is because the value of a single-family home is based on comparables, or the value of similar properties in the same vicinity.
With multifamily properties, however, the investor has more control over the value of the property. By implementing value-add strategies such as renovations, upgrades, and property management improvements, investors can increase the value of the property and generate higher returns. The value of a multifamily property is based on the NOI, or Net Operating Income. If the NOI increases, so does the value of the property – no matter what is happening in the neighborhood.
Reason #4: Easier Financing
Financing a multifamily property can also be easier than financing a single-family property. Multifamily properties are typically viewed as commercial properties, which means they can be financed with commercial loans. Commercial loans often have lower interest rates than residential loans, making them more relatively affordable. They’re also usually non-recourse loans, which means that in most situations, the guarantors’ personal holdings are not at stake in the event of a default.
Even better, as a passive investor in a real estate syndication, you don’t have to deal with any lenders or qualification processes, because you don’t have to sign on the loan. In single-family investing, you have to qualify for a new loan with every subsequent property, and you’re eventually limited in the total number of loans you can have at all. This process is also not known for being smooth and easy, to say the least.
Plus they’re typically recourse loans, which means if you default, the lender can come after everything you own. By contrast, as a passive investor in a real estate syndication, the only thing you have at risk is your investment principal.
Reason #5: Economies of Scale
Additionally, multifamily properties benefit from economies of scale. For example, expenses such as landscaping, maintenance, and property management can be spread across multiple units, resulting in lower costs per unit. This can lead to higher net operating income (NOI) and cash flow, which can translate into higher returns for investors.
While investing in single-family properties can be a great way to get started in real estate investing, scaling up to multifamily properties can provide even greater potential returns, less risk, greater control, and easier financing. If you’re ready to take your real estate investing to the next level, consider exploring the multifamily market and taking advantage of the benefits it offers.
As a passive investor in a real estate syndication, you can take advantage of all the benefits of multifamily investing with none of the headaches associated with being a landlord.
Further reading: 3 Options for Funding Your Investment in a Real Estate Syndication