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Economies of Scale - Top Benefits of Investing in Multifamily Real Estate

Most of us that are in real estate had a starter rental property that hooked them in through great cash flow, tax benefits, and rise in equity. In our case we rented out our home to move across the country to Evanston, IL so I could go to grad school. Once we decided to make real estate our focus for investments, we planned for our next step - getting into multifamily. In this post, I'll describe the economic benefits of a multifamily property over a single home property.

In multifamily, we can save money by buying in bulk. Similar to how Costco members benefit from buying in bulk at Costco, we are able to save money by purchasing items in bulk. When looking at costs for a property, we can evaluate based on purchase price per door. We take the purchase price of the property divided by the number of units, and we get a price per door. That price is usually substantially cheaper than the average price of a single family home in the area. We also save when buying in bulk for renovations and repairs - such as appliances, flooring, fixtures, etc.

We can save money through efficient operations. All of the rental units are in one place to service, and repairs and improvements can be made on multiple units at a time. In most cases, the repairs or renovations needed for one unit are similar to those required in other units, so the actions taken are repeatable and become more efficient over time.

There is some preferential treatment that a multifamily property has over a single family property. Properties with 5+ doors qualify for a commercial loan. At a high level, personal loans require personal income whereas Commercial loans require a solid business plan and team. In general, commercial loans often offer more capital at a lower interest rate for that amount of capital than a personal loan. Imagine trying to get a $10MM loan for yourself and how much interest that might require! Also the general partners establish a relationship with their loan providers which may give them some benefits that are not usually available in a personal loan.

We can spread the risk. In multifamily , there are many investors in the deal. Syndications are led by experienced general partners, and their involvement helps make the business more likely to succeed. If there are vacancies in multifamily, those vacancies are limited rather than affecting your entire property.


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