Ever consider investing in multifamily (2-4 unit) real estate? If you haven’t, you should!
Let’s investigate why it may be worth considering…
For starters, several major cities across the country (yes, including Sacramento) are experiencing a shortage of affordable housing.
Mainly, because the cost to build new apartments has increased due to rising wages and materials.
As a result, contractors are no longer building “C-Class” properties (this is your basic affordable rental unit). Instead, they are focusing on “A-Class” (more luxurious) apartments that offer pricey amenities because the numbers make more economic sense.
If you combine the new rental inventory (A-Class) that is being built and offered at higher price points, with the demand for existing affordable (C-Class) rental units, it’s no wonder why rents have seen 5-8% increases year over year.
To sum up my point…
Rents are likely to continue increasing due to the demand for affordable housing… not to mention, inflation!
Strong demands equals better returns and more cash flow over the long run – if you invest wisely.
Aside from a strong demand, here are 7 reasons why multifamily rentals are something you should consider.
1. Easy To Understand
One of my favorite parts about multifamily investing is that it’s easy to understand.
From a high level, the concept is simple…
Housing fulfills the basic human need for shelter and security because everyone needs a place to live.
And… With multifamily, there are multiple units available for rent, at an affordable price (generally lower than a single family home), all under one roof.
Pretty basic right? I’d say so!
The key to being successful in real estate (or any venture for that matter), is knowing and understanding the game you are playing. It comes down to being educated on the subject matter, and having the confidence to take action when the right opportunity presents itself. So, how do you get the education and confidence?
Fortunately, success leaves clues…
And… in the case of real estate investing, there are many.
Whether you are a newbie looking for your first deal or a seasoned investor trying to optimize your portfolio, there is a wealth of information available online and in books about multifamily investing.
There is a ton of information available at little to no cost! It will help you learn how to properly analyze, purchase, and manage rental property without having to spend thousands on seminars and “guru’s.”
Here are a couple multifamily resources that will help get you started:
Forum and online community: Bigger Pockets
eBook from Bigger Pockets: 10 Step Guide to Buying and Holding Mutli-Family Rental Property by Jay Helms
Book: Financial Freedom with Real Estate Investing by Michael Blank
Book: Wheelbarrow Profits by Jake Stenzaino and Geno Barbaro
I will leave you with a final note regarding education…
Reading and networking with mentors will help you shorten the learning curve and provide you with a higher level of confidence; however, rolling up your sleeves and taking action will bring you a completely new level of experience and knowledge.
There is no substitute for taking action.
3. Tangible – Real Assets
Real estate is tangible. You can see it, feel it, touch it, and even smell it if you want. Best of all, you have control over the use of the property.
Once you own real estate, you can rent it out, set it up as an AirBNB, remodel the property to add value, or further develop the land. The possibilities are only limited to your imagination (and local governing ordinances and zoning of course 🙂 ).
This is what makes real estate different from… oh let’s say, investing in the stock market.
With the stock market, you have ZERO control over the company’s performance and what the CEO chooses to do with the company’s assets. Sure, you can research the company, agree with the mission, and review past performance; but at the end of the day, you can only control when you buy/sell the stock.
Plus, if a company is really struggling, they can go bankrupt, restructure, merge, or close the doors. Not good for your stock price. (Yes, you can also diversify with mutual funds, ETF’s, and index funds… but, does that give you any more control? – not really).
Sure, real estate markets are cyclical and your properties value will go up and down… but the long-term trend with real estate is up due to inflation, the need for affordable housing, and the properties usefulness.
Point being… As long as people want to live inside, your property will remain valuable.
4. Multiple Value Add Opportunities
Along with providing safe, clean, and affordable housing, real estate investors are interested in cash flow and building equity. Multifamily property provides the ability to do both!
Here are some of the more common ways to increase the property’s value:
- If rents are under market, consider raising them when leases are up or a tenant moves out.
- Minimize late pays and delinquencies by hiring a professional property manager.
- Provide additional tenant amenities (i.e. covered parking, washer/dryer services, waste pickup, etc).
- Remodel the units to command a higher rental rate.
- Ratio Utility Billing – Have tenants pay for their own utilities
- Restructure your debt (i.e. refinance the mortgage, pay the mortgage down, etc).
- Shop different vendors (i.e. insurance, yard care, trash services, handyman).
Multifamily property is valued and viewed more like a business. Therefore, if you find ways to increase the monthly revenue and/or decrease the monthly expenses, your property will be more profitable.
More profit = higher valued asset
5. Multiple Income Flows
With a single family home, you only have one tenant… therefore, only one income stream. If your tenant moves out, your property is now 100% vacant. That means you have ZERO income until the unit is leased again.
One month of vacancy can really crush your cash flow (and your wallet) if your numbers aren’t great. Not to mention if the property needs any rehab work. In cases like this, its not uncommon to need to feed the property with your personal dollars to hold you over until the unit is filled. Not a great position to be in.
With multi-family, you have 2-4 tenants per property (or more if you start purchasing larger properties). This changes the income dynamic greatly.
For instance, let’s say you own a duplex (2 Units), and one of your tenants move-out. You are now 50% vacant. Obviously, this is still not ideal; however, you still have 50% of the revenue coming in to assist with your expenses (mortgage, taxes insurance, repairs, etc.).
As you scale your business and acquire additional units, the vacancy percentage will go down. For example, if you own 10 units and 1 unit goes vacant for a month, then you only have a 10% vacancy and are still receiving 90% of your total revenue for the portfolio.
More units = more income streams
6. Ability to scale
With multifamily, you can scale your business much faster than investing in single family homes.
Here are 4 reasons:
- Purchasing a multifamily property (2-4 units) takes the same amount of effort as a single family home. The process is virtually the same.
- Cash flow is typically stronger with multifamily property. More cash flow allows you to reinvest your profits into additional acquisitions.
- One 4-unit property will have 1 mortgage, 1 insurance policy, 1 tax bill, etc. But if you purchase four single family homes, you will have 4 mortgages, 4 insurance policies, 4 tax bills… point being… you can have more units, more cash flow, and less paperwork. Not bad!
- Lower management costs – once you own more than 4 units, you can often secure better and more affordable property management services. The same goes for maintenance services, yard care, etc. More units allow for economies of scale.
Final thought to consider…. If over the course 10 years you decide to purchase 5 multifamily properties (one property every 2 years on average), you will have acquired 10-20 leasable units (assuming each purchase was a 2-4 unit property). So, with only 5 transactions, you can own as many as 20 units. Do you think that would be life changing?
It does not take hundreds of transactions to build a life changing real estate portfolio, its starts with one.
7. Long Term Financing and consistent debt pay-down
Using debt (a mortgage) to purchase real estate is common practice with investors.
With multifamily (2-4 unit) properties, mortgage banks/lenders are willing to provide 75-80% of the financing but give you 100% control of the property, and allow you to keep 100% of any profits you earn.
All they are asking for is 20-25% down payment so that you have “skin in the game,” and that you pay the current market rate.
Basically, they are willing to partner with you on the deal. Pretty sweet right? Ummm… yea!
Best of all… the debt they offer has a fixed rate, is fully amortizing, and can extend up to 30yrs. This makes the mortgage expense very predictable for investors. We like predictable 🙂
Debt is a powerful tool. If used correctly, it can accelerate your goals in real estate. Used incorrectly, it can be dangerous. Do your homework!
Hope you find the information in this post useful.
All the best!
Want to buy, sell, or invest in real estate?
Silva Realty Team can help!
We cover Sacramento & Placer County in California with a special focus on Roseville, Rocklin, Loomis, Penryn, Lincoln, Newcastle, Orangevale, & North Natomas (Sacramento).