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"No Doubt About It…Multi Family Investors ‘Get It’…"


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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 property mortgage 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.


MINIMIZE EXPENSES


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 building insurance, 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.

Click here 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.


SUMMARY


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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13 Responses to No Doubt About It…Multi Family Investors ‘Get It’…

  1. Patty Newton says:

    Hi,
    I read your blog which is very interesting and gives insight to many things a layman person like myself would look pass, thanks.

    I need your clarification about detached units, are you referring to that each individual unit must be detached or every building with four units should be detached as it relates to appreciation.

    Quote:
    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.

    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

    thanks
    Patty

    • Hi Patty,

      Thanks for reading and glad you like the blog. To answer your question, the actual buildings should be detached for the best appreciation, not the units within. So in other words the ideal duplex would be a stand-alone building with the 2 apartments. The ideal triplex would be a stand along building with 3 apartments within. What I would not want is my duplex to be attached to a duplex that someone else owns. Most investors want a single detached building containing all the rental units, whether it’s a duplex or a 20-unit apartment building.

      Hope that helps!

      Alan

  2. Nancy Carroll says:

    What % down payment amount would you suggest in my situation which is:
    1. Trust fund investment (trust will pay for the property, but wants a down payment paid by me)
    2. Purchansing a duplex (both units 2 bedroom) for $121,000
    Thanks for your input.

    • alank856 says:

      Hi Nancy,

      Thanks for reading. To be honest I do not have any experience with trust fund investments so I’m not sure I can accurately answer your question. Do you need a mortgage in this scenario? If you do then I always recommend going for the lowest down payment amount possible. Each lender has different requirements regarding the down payment amount, so you’ll have to find out directly from your lender what % they require.

      Hope that helps, good luck!

      Alan

  3. Clifton Smith says:

    Why would you pay the lowest down payment? I figured the higher the down payment is the cheaper the monthly costs would be.

    • alank856 says:

      Hi – thanks for reading my blog! To answer your question, it really depends on your specific situation and strategy. For the vast majority of people, minimizing the out-of-pocket contribution should be the main goal because this maximizes your cash-on-cash ROI when you sell. The only reason to not put down the least amount possible is if you have money to burn. Otherwise, it it simply does not make any sense to put down more than what you absolutely must because the tenants will cover your monthly mortgage payments no matter what (assuming you made a wise purchase to begin with). Also, by minimizing the amount you put down to acquire the property, you will theoretically have extra money to put down on another property, thereby allowing you to maximize the power of leverage.

  4. Marina says:

    You have really interesting blog, keep up posting such informative posts!

  5. morgan says:

    Hello, – If my main goal is to maximize rental income/cash flow (so property price appreciation is only secondary), and i am nearing retirement, (and probably will just leave any real estate when I die to charities), isn’t it more logical to pay all cash for the property ( and not take out mortgages)? that way the cash flow is maximized. yes ? or am I missing something ? thank you,

    • alank856 says:

      Hi,

      Thanks for checking out my site. Yes I would have to agree: in your situation, if you have the cash to buy the property outright then that would be the best plan. My only suggestion would be for you to run your plan by your accountant to determine how you will treat the property income for tax purposes. Good luck!

      Alan

      Alan

  6. Tshepiso says:

    Hi, i have an undeveloped plot in a town near a residential area. My research shows a multi residential could be a good investment. What advice can you give me as some one who is aimed at building a multi res, that is how can I develop my plot to maximize profit?

  7. melody says:

    I have 3 rental units in Saint Petersburg FL with a positive cash flow. I will even carry paper for 15 years on them.
    If interested email me at mpfingsten5@hotmail.com

  8. Eric C. says:

    Thanks for finally talking about multifamily cash flow. Love it!

  9. Dominique says:

    Great post alank856,
    I’m a Realtor here in California that specializes in income/rental properties. Alan summed it in his posting in regards to income producing properties. 2-4 units is perfect for those looking to get in to the buy and hold investment strategy for real estate. Right now here in Southern California there’s a lot of opportunity in this arena. It astounds me as to why a lot of investors here are still going after single unit properties (SFR) for rentals. Why buy a single home when you can 2-4 units at just about the same price..Plus..if you have a single family resident for a rental investment and that tenant moves out…well so does your cash flow. And now your stuck with the expenses! But if you have a multi-unit and a tenant moves out you still have income coming to offset the expenses. So instead of income from 1 door you have it from either 2-4 doors..And of coarse there’s a lot more that I will not get into but…Alan covered some interesting and important facts about income property. Good Job!
    If any of you are looking to buy here in So. California and want to work with agent that has the knowledge and experience to help you buy right. Contact me: dltanks@gmail.com
    I’ll provide you with the same package that I give to my commercial clients which is a full on analysis of the property,income potential and expenses, a market and neighborhood trend report with supporting documentation. I do this so that you’ll be able to fully review the asset before making a buying decision..

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