Why should I invest in multifamily?

Question

I'm a seasoned retail real estate investor but I don't know anything about multifamily.  What are the advantages/disadvantages compare to other types of real estate investing.  What's your niche?  Is it a four flex, or a 50 unit building?  Hit me with your knowledge!

Terrell Garren · Answer

Personally, SFHs are an enjoyable hobby that cash flows like.  MF would feel like a job. Additionally,my kids will love me if I leave then SFHs.  They will not attend my funeral if I leave them MF.

Alecia Loveless · Answer

@John Mckee I have a SFH, a duplex, a triplex, and a 4-plex. I’m under contract for another duplex which I plan to turn into a triplex next summer and has the potential to be a 4-plex plus some garage storage next winter too. (Part of the sales agreement is that the seller has 4 months from closing to move out and she’s in the unit I will turn into 2 units and the garage that will eventually be storage of some sort).

I prefer the multis because you make more income under one roof. My area tends toward lower rents. My SFH is very nice and is going to rent for $1600, but my bigger multis bring in over $3200 a month.

All of them have 1 furnace and 1 roof, if the tenants want A/C they have window units they pay for. The first thing I do when I buy a property is update the CO detectors and the smoke detectors. Then I go after wiring problems which probably isn’t as much of a problem in newer construction. If I had central air I’d have that serviced if it hadn’t been recently.

Given their age in any other metropolitan area my properties would be considered B-  to C properties but where I live there’s just not much new housing so it’s in such good shape it’s probably a B+.

Locally There’s 25 rent controlled units that are 5 months old that you have to make between $37,000-$75,000 to live in and probably 120 units that are between 10-20 years old. Otherwise it’s all old houses divided into apartments.

Typically in my area I would be responsible for lawn care and snow removal but due to several unique properties I only have lawn care at the duplex which I house hack and snow removal at the 4-plex which has a shared driveway and I provide the snow plowing and the gentleman who shared the driveway with me provides the lawn care.

Greg Scott · Answer

Reasons I like multifamily vs retail

• I have a more diverse customer base.  In a large apartment, if one resident moves out, I'm not too worried.  In most cases that I can think of a retail tenant makes up a larger portion of the total building rent.
• Leases are shorter, so I can capture additional revenue when rents rise.
• Everyone needs a place to live, but not everyone needs to go to a retail store any more.
• When times get tough, like during a pandemic, is the government more likely to help people or stores pay their rent?
• With all the bathrooms and kitchens, the value of the land is a lower percentage, so more can be depreciated.
• Residential buildings can be depreciated faster than commercial, to shield a higher amount of cashflow from income.

Aside from the above list, multifamily shares a lot of the same real estate benefits as retail, including the ability to drive income and appreciation through your own efforts.

FWIW, a fourplex, triplex, duplex are a strange area of overlap between single family and true multifamily.  They are valued based on comps and not NOI / Cap Rate, so you lose the ability to drive appreciation, and if you cannot find good comps, they can be hard to refinance or sell.

Account Closed · Answer

Large multifamily - 100+ units. You'll end up there anyway - so why not start there! Best of luck :)

Brock Mogensen · Answer

Economies of scale in a larger apartment building is a huge advantage.  Once you get into the 100+ unit range, the property can support a full time maintenance person and likely a full time leasing/on-site PM.

John McKee · Answer

Rent controls? ...seems like maybe a potential negative, but maybe also insures as steady stream of renters?

Bud Gaffney · Answer

@John Mckee Because it’s amazing and you get wealthy.

John McKee · Answer

Great thoughts.  Feed me some more positives or negatives.  What about heat and AC, are they all separate units or a central system?

The negatives I would imagine are frequent turnover of tenants, cost, and time for repairs.

Is there any kind of other value add other than raising the rents?

Tyler Sweet · Answer

For me, it's all about the power of economies of scale. Let's say I have a triplex:

- If I increase rents by $100 a unit, I'm increasing revenue by $300.

- When I replace a roof, I'm replacing 1 instead of 3.

The list goes on and on, but those are some basic examples.

Why should I invest in multifamily?

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