Why is it that most veteran real estate investors prefer multifamily (MF) over single family (SF) properties?
The benefits of investing in multifamily are endless, including the ability to increase efficiency, lower vacancy risk, and impact more lives. If you’re on the fence about jumping into the world of multifamily investing, consider these eight key differences between single and multifamily properties.
Lower Vacancy Risk
Life happens to everyone, even our tenants. New jobs, relocations, loss of work, and family emergencies are just a few causes of unexpected notices to vacate. SF homes do not allow for flexibility when it comes to vacancy rates. The loss of one tenant brings you right down to 0% income for the entire property. Whereas, when you own a MF apartment, the loss of one tenant results in minimal impact to your bottom line. While it would be ideal to always maintain 100% occupancy, that is not realistic. Having multiple units under one roof creates a higher vacancy tolerance.
During 2020, after the world shut down due to Covid-19, we experienced the difference in vacancy risk between the two asset types first hand. One of our SF tenants was out of work for several months, resulting in her inability to pay rent and therefore, $0 in rental income for us. On the other hand, our MF assets didn’t register much of a rental blip at all, as the vast majority of tenants continued to pay rent on time during those uncertain times.
More Control of Property Value
There is a common misconception that SF homes are valued in the same manner as MF apartments. While both take the market value of the property into consideration, there is one key difference - MF property valuations are determined based on the income produced by the apartment as well.
Using gross rent multipliers (GRM) and cap rates, the value on a multifamily property can be significantly increased, well beyond what it would be using comps alone. An incremental increase in rent of $100 on a multifamily property can push the value up by nearly a million dollars. For more on this topic, check out this blog.
More Reliable Cash Flow
The cash-on-cash return on a single family home is typically less reliable and lower than the return on a multifamily. For a single family home in a coastal or high population area, vacancy rates tend to be much lower. However, there are several factors that eat into the potential cash return, including higher property taxes, more tenant friendly legislation, and labor costs. On the flip side, lower population areas may require less in taxes and may have less regulations; however, vacancy rates in these areas can be more unpredictable.
The impact of many of these factors are limited when it comes to MF assets, as labor and operational costs per door are markedly less, resulting in more cash on cash. When you can pay a contractor to visit five of your units in the same trip and purchase materials in bulk, you’re likely going to pay less per unit than you would to have the same work completed on a single-family home. With the higher vacancy tolerance of a MF asset, a couple of empty units also will not have a dramatic effect on your cash flow in the same way that SF vacancies do too.
Greater Community Impact
When you make improvements to a MF apartment, you are making improvements on a community. Real estate investing is not only about making an abundance of money. While it is an amazing way to grow your net worth, it is also an avenue to create positive change for families within the community. That said, MF investments allow you to scale your positive impact to 50, 100, or 150 families rather than one at a time!
Greater Efficiencies
Having multiple units under one roof creates greater efficiencies through economies of scale. Plumbing and maintenance issues are inevitably going to happen. We once had a tenant in one of our single-family properties whose toddler loved to flush toys down the toilet. Attempting to get a plumber to go out for one small job was tedious and expensive.
On the other hand, with our MF assets, our institutional-grade property managers have systems in place that create more efficiencies, and our contractors can get more work done in one trip by pooling together multiple maintenance tickets to take care of at once. These optimized operations cut wait times and labor costs significantly.
Freedom from Liability
Passive investors in a MF syndication will never be personally liable for the liabilities beyond their investment capital in the syndication. The General Partners generally take on all the risk associated with the syndication. However, if the asset is purchased on a non-recourse loan, even the General Partners are not directly tied to the liability of the loan. The property itself becomes the collateral so, in the unlikely event of a default on the loan, the property is on the front line rather than the GP’s personal finances.
However, single family home loans are usually tied directly to the borrower and in the event of default, the bank can seek appropriate monetary compensation by pursuing the borrower’s assets directly.
Financing Scalability
Obtaining the necessary financing for real estate investments comes in many different shapes and sizes depending on factors such as: what type of lender you’re borrowing from, how much you’re borrowing, and the length of the project. Hard money loans are a convenient, but more expensive lending option as they come with higher interest rates than traditional bank loans. Investment loans are available from traditional lenders however when it comes to single family homes, bank loans are usually dependent on your personal credit. Traditional loans are also limited to 10 SF homes per borrower, making it challenging for an investor to scale their SF portfolio.
Financing for MF properties, regardless of type of loan (bridge, local bank or agency), is dependent on the property’s financial performance rather than on your personal finances and is not limited to the amount of properties you own. In fact, the more experience you have, the better! The financial possibilities are much more flexible for investors looking to scale through MF.
Overall, MF investments are the key to a well-rounded, scalable, and more secure real estate portfolio. If you’re considering expanding your real estate portfolio with multifamily investments, sign up to join Diamond Point Home’s Investor’s Club so that you will be notified of our latest offerings!