How to Make the Leap From Single-Family to Multi-Unit Properties

Once you’ve been investing in real estate for a while, there comes a time when you naturally want to progress to the next level. For residential real estate, the next level up from single-family rentals is multi-unit properties. This investment class has the potential to provide considerable financial security for you and your family for generations to come. When you move from single-family rentals into multi-unit properties, you’ll be following in the path of some of the most successful real estate investors in history. But first, you need to learn what steps to take to get there.

Why Should You Eventually Graduate to Multi-Unit Properties?

Apart from the desire to grow your wealth, there are many reasons to eventually make the leap from single-family to multi-unit properties.

All Under One Roof

The first benefit is convenience. With everything under one roof, logistically, it’s easier to manage one multi-unit property than it is a collection of single-family rentals situated all over the map. There’s only one property to travel to, one location to organize and one location to handle. It’s even easier with the leases themselves. Instead of worrying about dealing with different lease terms and details for each property, all you need to do is create one boilerplate lease and change the tenant names as needed when the lease turns over.

Scalability

Multi-unit rental properties can be scaled up very quickly. You can keep growing exponentially because you know precisely what rent to expect. Additionally, when you have one multi-unit building successfully handled, you can use that asset to more easily acquire funding for your next multi-unit building, and so on. Essentially, making the leap from single-family to multi-unit properties is a big step toward securing your future wealth. 

Predictability

There’s a great amount of predictability built into the formula for success with multi-unit properties. Almost every rental property will need some rehab work before it can cash flow. In the case of single-family rentals, each one is different than the others. With multi-unit properties, once you go through and renovate one unit you already know what to do for the rest of the units because they’re all the same for the most part. This makes it possible to accurately predict what the rehab costs will be for the entire building. In turn, this makes it easier to estimate future cash flow for each unit.

Security

Multi-unit rental properties bring an extra layer of security, too. If one tenant vacates, you still have a building full of other paying tenants in place to cover the mortgage. And, by implementing a simple lease staggering strategy, you can ensure that all of your leases don’t come up for renewal at once.

Increased Revenue Potential

Multi-unit rental properties offer the potential for additional revenue streams that you don’t get with single-family rentals. You can offer additional amenities for a nominal charge, such as:

• secured storage units
• covered parking
• coin-operated washers and dryers
• on-site vending machines
• coin-operated bike racks

How to Make the Leap From Single-Family to Multi-Unit Properties

Now that you know why you’d want to invest in multi-unit properties someday, here’s how to make that leap.

Start Small

Doing a multi-unit rehab is a lot of work- a lot of work. This is true even when you have a team doing the manual work for you. For this reason, you should start small when getting into multi-unit rental investing. I recommend you start with a duplex. If that works out, then move up to a four-plex. This way, you can test out your team, your processes and other moving parts to see how they work with multi-unit properties. This also gives you the time and firsthand experience to learn more about the differences between owning single-family rentals versus multi-unit properties. Another big advantage to starting small with duplexes or four-plexes is that you can still qualify for conventional financing. Once you go beyond four units, you have to get commercial financing, which is another whole ball game.

Have a Property Management Company in Place

You’ll need to find a different property management company for your multi-unit property. Single-family home rentals property managers often aren’t set up for multi-unit rentals. Do some work and find the right local property management company for your project.

Build Up Your Cash Reserves

Multi-unit properties are very cash heavy up front. Not only will you need to put 25% down on a much larger purchase price—you also have to pay for more and expensive renovation work. Consider the following examples from a recent multi-unit rehab project that my company, MartelTurnkey, undertook in Cleveland:

stair landing, handrails, and catwalks - $100k

perimeter fence - $15k

multiple new HVAC units - $25k

Other things you have to pay for with multi-unit properties include:

• appliances
• CAM ( common area maintenance expenses) – indoor plant care, floor cleaning, elevator maintenance, etc. (ongoing)
• exterior lighting
• landscaping (ongoing)
• water and sewer (often can’t split among tenants because have only one line and one meter - ongoing)

Obtaining Financing for Your Multi-Unit Property Investment

Lenders for commercial projects have different criteria for approval. They don’t look so much at your income, but they do look at how much cash you have on hand. Another thing they look at is how much experience you have being a landlord of a multi-unit property. This is another reason why it’s good to start small with duplexes and four-plexes; you’ll have greater odds of success that you can demonstrate when it’s time to apply for commercial financing.

Know that it’s harder to get financing for multi-unit properties. You’ll likely go through Freddie Mac’s loan qualifications, which may include the small balance loan program they run for properties between five and 50 units. Finally, your minimum borrow amount for a commercial loan will be a million dollars – another reason it’s hard to qualify. 

I realize that all of this sounds intimidating. Remember that this is something you grow into. By the time you’ve successfully owned ten or 20 single-family rentals, you’ll have the confidence to undertake a multi-unit property investment. At my company MartelTurnkey, it’s my hope that all my investors will eventually be able to graduate into multi-unit properties. The easiest way to climb the ladder toward multi-unit properties is to start with turnkey rentals. Contact us to learn how.