Top 5 Reasons You Should Be Starting Out in Multifamily

by | BiggerPockets.com

Starting out in small multifamily units is the best use of your money as a new investor for a multitude of reasons. For one, it’s a great way to start gaining experience and putting cash in your pocket to grow your portfolio versus the slow growth option of single family buy and hold.

Below are some of the top reasons you should be spending your time and energy looking for small multifamily properties as a first investment.

5 Benefits of Small Multifamily Properties for New Real Estate Investors

1. Better Financing

One of the best arguments for investing in small multifamily is the fact that you can obtain 30-year financing. There are a few key factors that make this attractive for investors.

First, you will likely get a lower interest rate with a 30-year fixed loan, unlike most commercial loans, which can be a percentage or two higher than the prime rate.

Secondly, since your payments are spread out over 30 years, your monthly cash flow will be higher because you don’t owe as much money per month to the bank. This is incredibly helpful when you are just starting your investing career.

It will take longer to pay down your home, but you always have the option to pay more than you owe each month. With a 15-year loan, you are required to pay a higher monthly amount no matter what. But having the option to pay a smaller amount is a huge bonus if you ever find yourself in a difficult financial situation.

Another huge financing benefit for small multifamily units is the ability to finance a property with an FHA loan or VA loan for little to no money out of pocket. You can buy a single family home with a VA/FHA loan and have a liability, or you can buy a multifamily property with the same type of loan and have an income-producing asset that will project you and your investments further and further ahead each month.

Related: What is a VA Loan and Why Should I Consider Using One?

2. Lower Risk During Vacancies

The next largest advantage of investing in small multifamily is the ability to spread your vacancies over multiple units. When you own a single family residence and that property goes vacant, you are responsible for covering not only the entire mortgage, but also the extra holding costs that most people don’t account for (like lawn care, electricity, water, and gas).

A vacant rental house in the Midwest during January can easily add $200 to $300 of utility bills on top of the mortgage! And a few months of winter vacancy can chew up your cash flow faster than you can save it up—a big problem for any savvy investor.

A mentor of mine once described it to me like this: “If you have a farm and your family relies on one cow for milk, if that cow gets sick, your family is going to go hungry. But if you have multiple cows on your farm and one gets sick, your other cows can at least feed your family while your sick cow recovers.”

It’s a concept that is beyond true and applies so well to real estate investing. This is the reason that professional investors do not spend their time buying single family homes. It’s all about economy of scale, and in this game, there is safety in numbers.

gray and white small multifamily real estate

3. Ability to Add Sweat Equity

The third advantage of small multifamily investing is the ability to add sweat equity while you are living in the residence. Sweat equity is a term that people use when they are referring to the process of adding value to their home through physical labor.

If you buy a building and update it with new paint, appliances, and fixtures, you are adding sweat equity. (You’ll be sweating because you’ll be working so hard to add that value.) This is beneficial as adding value to your home oftentimes allows you to increase the amount of monthly rent, thus increasing your overall income.

Multifamily homes are typically appraised like commercial properties because their value is based upon the amount of income they produce. So when you buy an apartment building, the main indicator of price is driven by the income that the building produces, whereas a single family home is often valued by factors like the amount of bedrooms, the type of fence in the backyard, the size of the garage, recent sales in the neighborhood, etc.

Many appraisers will do what’s called an “income approach” in their valuation of the building, along with seeking out recent comparable sales in the area. Thus you can add value to a small multifamily home by simply increasing the rents!

4. Ability to Self-Manage

Living in your own multifamily unit allows you a few key advantages as far as management. The opportunity to self-manage your building is one of them!

Most new investors want to be involved in the day-to-day management of their property, and the best way to be involved is to live in the rental that you own. We lived in a duplex as our first home and self-managed our tenants next door. We learned a TON about management, and it really pushed us to understand our local and state laws regarding landlords and tenants.

We no longer self-manage our rentals. But because we did at one time, we know exactly what we want out of future property managers, and we know a few of the extra addenda we want added into our leases.

Related: How to Safely Navigate Landlord-Tenant Laws as a Real Estate Investor

Open door with keys, key in keyhole

5. Live for Free

Let’s be honest, the number one most attractive quality to investing in small multifamily is the ability to live for FREE! And if you don’t live for free, you can at least live for far cheaper than if you would have purchased a single family home.

We purchased our first duplex with a VA loan, which allowed us to put $0 dollars down on a property up to four units. This enabled us to get in right away with no money out of pocket.

We did some research on local banks and found out that one in particular was not only offering the lowest rates available, but they were also giving a $5,000 credit toward closing costs. For us, that amounted to about $2,500.

So we walked away from the closing with a duplex and $2,500 in our pocket! Plus, we got to live in our four-bedroom, three-bathroom, 1,900-square-foot duplex for only $400 per month.

By creating this scenario, the money we were able to save over the course of three years totaled roughly $36,000. That gave us a huge head start in terms of making other investments, and all I had to do was buy a multifamily home to get there.

Conclusion

As you can see, there are many good reasons to start out in small multifamily instead of single family homes. Since investing in multifamily and “growing our herd,” we are able to sleep better at night, knowing that we’ll never be drowning due to one vacant unit.

The first vacancy we experienced with one of our single family homes was one of the most difficult times we’ve had in our investing careers. It brought about feelings of failure and dismay, because the house sat empty for two months. Meanwhile, we were paying out the nose for it.

We now only buy multifamily properties. When one unit is vacant, I can rest assured that the other tenants are still paying down the mortgage for me. We never rule out a great deal on a single family home, but for us, our future is all multifamily.

hard-money-lenders

Are you considering investing in multifamily properties? Do you have any questions for me? Or do you prefer single family homes? For what reason(s)?

Let’s discuss in the comment section!

 

About Author

Ryan S.

Ryan Sajdera is currently serving as active duty aviation officer for the United States Army. He is a combat veteran of Operation Resolute Support, having served in multiple regions of Afghanistan, and also holds a bachelors degree in Health and Human Sciences. He is the President and Founder of R&S Property Group, LLC, and currently owns six multifamily units with two mobile home parks under contract. Ryan began investing in early 2016 with little to no money by utilizing the VA loan, and has since worked alongside his wife, Sarah to continuously grow and build their business with goals of achieving complete financial freedom through real estate.

18 Comments

    • Ryan S.

      Hey Tanya! To answer your question, I would say you have to stick to your numbers! If you can make a good return in a high cost city, then it can work. We have mostly invested in smaller markets that don’t see as much market volatility and price fluctuation, so I can’t really speak for large markets. We like the smaller markets personally because we find better deals for better prices with higher returns, but that has just been our limited experience over the past few years investing in the military. Thanks for your support!

    • Gregg Kiefer

      Hello, Ryan. Nice article and thanks for your service and sacrifices being in the military. My wife and I currently have a condo near a major university. It’s owned free and clear and providing $500 net income monthly. However, the prices have risen by more than 50%, and I can’t make sense of financing another one. However, I would like to invest in a small apartment building to boost my retirement income as I hope to retire in 2.5 years. How do I find these apartments— through a commercial broker? What percent down could I expect to pay? Could I pay someone to help me review the investment to ensure I do not make a major mistake as I would be putting, likely, a large portion of my savings into such a deal.

      • Ryan S.

        Hey Gregg,

        I wish I had enough space on a page to help answer all of your questions, but the best answer I can tell you is relationships, relationships, relationships! Get to know your bankers and brokers and they will keep you in mind when one of their contacts is selling! The amount down widely depends on the asset class, but I think 20% down on the commercial side is pretty standard. I always plan to put at least 20% down on any deal!

  1. Kevin K.

    Great post Ryan,

    Just to clarify your first point most commercial loans are amortized on 25 or 30 year terms with a 5-10 year call (balloon payment) so your monthly payment would be reflective of this. But your are absolutely correct about the interest rates generally being higher. Also, generally higher down payment requirements as loan-to-value ranges from 70 – 75% for multi-family and can be as high as 65% for a non-multi-family commercial property and debt service coverage issues if you have vacancies the banks may require you to put more cash in reserves.

    Great post and Thank you for your service !

    • Ryan S.

      Hey Kevin! Yes, that is a great point. It really depends on the lenders appetite for risk. Our current bank here will not push their commercial loans over 20 years at all! I do love the flexibility on the commercial side as far as lending goes, but I really wish i could get a 4.5% interest rate on a commercial loan! Lol! Hope all is well.

  2. Brian Leigh

    Interesting article. I am just starting out in REI so most of this pertains to me. Most of the points you mention are aimed at house hacking a multifamily property. My question though is what if you already own a personal residence or are in the process of purchasing one and it is not a multifamily?

    • Ryan S.

      Hey Brian! There are so many ways that you can make a single family into a great investment! If you are single, you can consider renting out a spare room to a friend or colleague, or even doing an AirBnB style short term rental. Multifamily is a great tool, but its not the ONLY tool. If you find a space that can make your money work for you, then you found a good space. I hope that helps. Bottom line-don’t think that you can’t invest in single family if that’s your only option at the moment.

      • Ryan S.

        Hey Ronaldo,

        I can’t give you a substantial yes or no on that question, as every bank is a little different on what they can and cannot accept, but if you own the property, you will likely have a good chance of being able to use the equity in that property as collateral.

  3. Bill Blass

    You need to be careful with this approach if using the VA loan. They are not meant as a starter source for small businesses, it’s supposed to be used for your primary home. If they approved of your use, well good for you, but it’s not something most people may realize when reading your story.

    What are you spending paying someone else to manage your properties in these military towns? Typically, most military members I know of got shafted by unscrupulous and expensive managers whenever they needed to use one.

    • Ryan S.

      Hey Bill,

      We lived in our house for 3 years, so it was a really great option for us to start investing. You are required to have owner occupancy when using the VA loan. We pay managers between 8 and 10 %. I’ve noticed that most of the PM companies here want to charge around 12% if you only have one home because its not a big gain for them to take on single family homes they seem to negotiate a little better when you have multiple units to bring to the table.

  4. Peter Eiseman

    Great article and I agree with your reasons 100%. For some reason so many investors think they need start with SFR to slowly graduate to MF investing. I don’t follow that way way of thinking and I don’t believe that starting out with SFR is necessary and really doesn’t help much in preparing anyone for investing in MF.

    I have also written several articles posted on Linkedin regarding the numerous benefits of investing in MF vs SFR.

    I’ll look forward to reading more of your articles on MF investing.

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