"No Doubt About It…Multi Family Investors ‘Get It’…"
My uncle and I are multifamily investors. We focus specifically on 2-4 unit residential multifamily investment properties.
Investing in multi-family properties is worth considering, especially when just starting out, because it optimizes your cash flow by maximizing rental income and minimizing expenses.
MAXIMIZE RENTAL INCOME
Multifamily investors know that rental income is almost always higher for multifamily investment properties compared to single-family homes. This is critical in today's market.
Since 2002, home prices have shot up 50% or more in some markets, making the majority of single-family rental properties too expensive for investment purposes (assuming you need a mortgage). In today's world, the single-unit rent roll is usually not enough to cover the
needed to purchase the increasingly expensive single-family home.
Additionally, multifamily investors enjoy reduced vacancy risk, because you're not simply relying on 1 income stream per property. For example, if you have a 4-unit property, and 1 unit becomes vacant, you're still bringing in rental income from the other 3 units. Conversely, if a single-family rental becomes vacant, you’re bringing in no income whatsoever until you get a new tenant.
The bottom line is that small multifamily investors are aware that properties with 2-4 units have rent rolls that are 2-3 times greater than single family homes. Additionally, the vacancy impact is much lower. So, the cash flow is better.
As previously stated, multifamily investors optimize cash flow because they enjoy greater rental income & reduced vacancy risk by virtue of having multiple units. Meanwhile, your per-unit property costs
are lower. Specifically:
- Multifamily property prices are usually lower on a per-unit basis. For example, in my market you could buy a single family home in a lower income neighborhood for approximately $150K. You could buy a duplex in the same area for $180K. So in this example you're paying $150K per unit on a single-family home, but only $90K per unit on the duplex. Typically, the cost per unit goes down the more units you have at a particular property.
- You'll avoid commercial status: Any property with more than 4 units is considered commercial. This lends itself to higher expenses. For example, the interest rates on commercial loans are typically 1-2% above rates on similar non-commercial loans, and the down payment requirements are usually greater (sometimes 25% or more). Other expenses such as
rental property tax,
and water/sewer also tend to be higher.
- You'll minimize inspection scrutiny: Inspection requirements are typically more stringent on "commercial" properties, which lends itself to higher repair & maintenance bills. For example, in NJ a 5-year state inspection is required for all commercial properties, in addition to the local municipality inspections. Conversely, NJ duplexes are not subject to the state inspection.
for more general info on how to optimize your revenue / expense equation.
OTHER MULTIFAMILY PROPERTY TIPS & TIDBITS
- Most multifamily investors use a
rental property agent
that specializes in multi family investment properties. And you should too. Ideally, your agent will have his/her own portfolio of multi-family rental properties, although this is not a hard and fast requirement. The bottom line is that if you want multifamily investment properties, it makes sense to work with an agent that has vast knowledge in this area.
- Usually, old properties (50 or more years old) in older neighborhoods offer the most value.
- Obviously, the rent roll strongly correlates with the property valuation,
and this is determined in part by the number of bedrooms in each unit. So all else being equal, you'll want properties with multi-bedroom units. Not only do 2-3 bedroom units command more rent, but they also tend to have a more stable tenancy. One-bedroom apartments often attract more of a transient population, which means the turnover is typically greater.
- Avoid properties with wells and septic systems because they could create a lot of problems and added expense down the road.
- Focus on detached multi-family houses. In other words, avoid twins, condos, row homes, etc., because these types of structures usually do not appreciate as much as detached structures.
So there you have it. As the headline says, multifamily investors "get it." They understand that investing in multi-family properties:
- Maximizes rental income via multiple income streams and diminished vacancy risk.
- Minimizes expenses via a lower per-unit purchase cost, and an avoidance of "commercial-grade" inspection, mortgage, tax, and utility expenses.
These are the main reasons why investing in multi-family properties is the best and safest way to dip your toe into the wonderful world of rental property investing.
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