5 Reasons Why Multifamily Investing is Superior to Single Family Investing

Most real estate investors get started with investing in single-family properties and either end up losing money or the “investment” turns into a full-time job. The whole reason for investing is to make your money work for you. Investing in multifamily real estate eliminates the downside of single-family properties while keeping all of the benefits.

#1 Economies of Scale

Investing in single-family properties is very all-or-nothing. The investment makes money until there is a vacancy or repair and there goes the profit for the whole year. A benefit to multifamily investing is the scale that the property gives. The scale of multifamily properties provides a level of stability and safety that single-family properties can’t provide.

If there is a vacancy in a single-family property the investment doesn’t make any money for each month it is vacant. If one unit is vacant in a 100-unit property the property is still collecting rent checks on 99 units. The same can be said with any of the “nightmares” that happen with investing in single-family properties such as evictions or maintenance. With multifamily investing, there are other units to offset the costs that happen.

Tenant turnover costs add up quickly and can easily be in excess of $2,000.? This will kill your cash flow for the entire year and that doesn’t include the vacancy costs while the repairs/cleaning is happening.

#2 Stable Cash Flow

Due to the vacancy, make-ready costs, and maintenance costs of investing in single-family, it is hard to cash flow single-family houses. These properties might make sense on paper but in reality, single-family homes are hard to cash flow. The steady cash flow of multifamily properties comes from the other topics discussed in the article:

Economies of scale – Multifamily properties have multiple units that can offset any expenses. Single-family properties rely on one tenant’s rent to cover all expenses.

Professional property management – Multifamily properties generate enough money to be able to hire a legitimate property management company with an onsite manager who has the systems and experience to run multifamily properties. Single-family properties can only budget $100 - $200 a month for property management, how much effort can they be putting into the property for that much money?

Forced appreciation – Although you can add value to single families through renovations, you don’t get the exponential appreciation you get with multifamily properties.?

#3 Professional Property Management

Some single-family investors manage the property themselves and some hire a property management company. If you self-manage the property, you are basically buying a job. Managing tenants is a hard time-consuming job, especially if you are investing out of state. If you hire a property manager, they are going to take 10% of the rent as a fee and some property managers charge a placement fee of the one month's rent. Finding a good property manager could be as difficult as finding the right property, if you think about it, the property manager is getting paid 10% which is $100-$150 a month to manage the property. Do you think they are going to take care of the property as much as you went them to for that much money?

Since multifamily properties generate more rental income than a single-family house, the investment can afford a real property management company with the right systems in place to run the property you would expect them to. Having a good property management company watching over the investment is a game-changer in terms of lowering expenses and maximizing profits. The right property manager will have their finger on the pulse of the local economy (knowing when to raise rents), be onsite at least 5 days a week (preventative maintenance & tenant satisfaction), and have the right processes to place the best tenants (less turnover, evictions, and damage).

#4 Forced Appreciation

Single-family properties are valued based on comparable sales of other “like” properties. Multifamily properties are valued based on a multiple of the property’s income. What this means is to find the value of a multifamily property, you take the net operating income (income – expenses) and divide it by the cap rate (we’ll get into cap rates in a different article).

You can increase the value of a single-family property by painting, renovating, cleaning, etc. but the property is still going to be based on what other “like” properties are selling for. You are not going to be able to get the exponential appreciation that you can get with multifamily properties unless you have construction experience and purchase an extremely run-down property.

A quick example of forcing appreciation in a multifamily property is painting numbers on parking spots. Painting the parking spots cost $500 and you tell the tenants they can reserve a parking spot for an extra $20 a month. If this is a 100-unit and 40 tenants agree to reserve spots that will add $9,600 in yearly income. To see how this affects the value of the property you take the income generated and divide by the cap rate. For this example, let’s assume a 6% cap rate. $9,600 / 6% = $160,000. $160,000 from a $500 investment.

Just remember, the value of the property is a multiple of the NOI so every dollar gained in income can be 20x in value.

#5 Financing

Single-family loans are based on the financial strength of the borrower. Multifamily loans are based on the financial strength of the property. What that means is the bank doesn’t care if the single-family property is going to make money, they care if you can personally pay the mortgage with W2 income. As for multifamily properties, the bank cares that the property can cover the mortgage payment after all expenses are paid, the bank doesn’t care if your W2 income can cover the mortgage or not.

This is a benefit to multifamily because after you buy a couple of single-family properties it starts to become harder to qualify for mortgages because the bank takes into account the other rental property mortgages as personal expenses, but doesn’t necessarily take into account the income from those rental properties.

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