WHY APARTMENTS ACCELERATE WEALTH FASTER THAN SINGLE FAMILY INVESTMENTS

In my last article, THE FORMULA FOR WEALTH, I explained WHY real estate is the only investment vehicle that can help anyone to ENHANCE, ENRICH and CREATE TIME ABUNDANCE in their lives and HOW it works relative to stocks and bonds.

While there are so many investment choices in the real estate space to pursue, multi-family is arguably the most lucrative real estate investment. Apartments give the busy investor the best opportunity to apply education and action with the minimum amount of time to maximize long-term wealth.

Like food or water, shelter is a basic human necessity. Apartments are in high demand because they provide a simple, affordable option for college students, young professionals, singles, empty nesters, low-income workers and temporary residents, which are demographic segments that will never go away.

Here are some of the reasons why Apartments can accelerate your wealth faster than Single Family Rentals:

1. Demand – Approximately 10 Million renters have been added to the market since 2008 while US home ownership is at a 55 year low. The 2018 tax reform act will most likely create more apartment renters with an estimated 5-6 million new renter households created before 2028. This is possible because the two largest generations in American history— Millennials & Baby Boomers — are gearing towards a renter’s nation mindset preferring to rent over home ownership.

1. Scale Forced Appreciation – Can ‘enhance’ appreciation by adding value to a property without relying on the real estate market to rise. Raising rents, improved asset management, controlling expenses and fixing deferred maintenance can dramatically increase the selling price at exit. While single-family properties are valued by local sales comparisons, multifamily properties are valued by their net operating income (NOI). The bigger the NOI, the more value created. Rule of thumb: $1 NOI increase creates $10 of additional equity. For example, if rents increase by $20/month on a 100 unit building the yearly NOI will have increased by $24,000. This one rental increase just raised the value of the property by $240,000! This is the single biggest advantage over single family: Forcing appreciation at scale with multiple levers (raising rents, better management, adding valued services, fixing deferred maintenance, controlling expenses) over multiple units. The ability to create equity with apartments is like riding a 10-foot wave while single family will only feel like a 5-foot wave.

1. Economies of Scale – Sheer power of multiple living units provides greater opportunity to leverage time and profit, reducing investment risk. Apartments create an easier management structure with multiple units on one address versus several single-family rentals at different addresses.

1. Big Cash Flow – More rental units under one roof means more cash flow. A modest rental increase across apartment units can result in much higher cash flow. There is also safety in numbers: 5% vacancy rate on a 100-unit complex will barely affect cash flow. A vacant rental house produces no cash flow.

1. Favorable Lending – It is easier and less risky to get a loan against a bigger apartment complex then it is for residential rentals. Apartments more than 5 units are commercial property and are evaluated more on income potential with the buyers credit score being of little importance to determine interest rates and credit worthiness. Any property 4 units or less is residential property and is valued more on area sales comps with the buyer’s credit score weighing heavily on interest rates and credit worthiness. Lenders look at commercial properties as a business because they have the potential for multiple revenue streams while single family revenue potential are well, just singular. Lenders also favor apartments because historically they have a much lower default risk than single family.

1. More stable, Better Performing and Less Risk than Single Family – More tenants creates additional revenue streams beyond rental income. Apartment owners can execute service contracts to make their tenants lives more amenable. Coin-operated washers/dryers, snack vending machines, storage units, cable/dish networks, pest control and trash valet are valuable services that can be contracted out to third parties with a revenue sharing plan benefiting apartment owners. Carports and garages often go for a premium. Utilities such as water, electricity and gas can be billed back to tenants up to 95%. Monthly pet rent, non-refundable pet deposits and late fees also add up. Multiple revenue possibilities create extremely stable income and can even become less risky in economic down turns because as single family foreclosures increase, people tend to turn to apartments in times of uncertainty.

1. One Exit­ – If you need to recoup your capital, you will have just one exit strategy to deal with when you own a multifamily rental. If you have a dozen single-family homes that is 12 properties you have to market and sell in order to liquidate your holdings. Yes, it is harder to sell multifamily than a single family home, but when you need to get cash, it is better to deal with one sale than be burdened with trying to sell 12 individual properties.

There is safety and more profit in Multi-units than a single-unit. The busy investor can use this specialized knowledge and take action by leveraging the time, experience and skills of an experienced apartment operator to accelerate wealth.

Live above the line,

Stevan Garcia