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.
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.
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.
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.
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.
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!