Posted about 3 years ago

$50,000 to Invest?...why you should buy as many units as possible

Like many investors, I started in this industry by investing in single family residential (SFR) rental properties. And I never really considered multifamily (MF) rental properties until I was several years into the business. Since then, I've learned that the most successful people in this industry aren't flippers, wholesalers, doing lease options, or note buyers; they're buy-and-hold multifamily property owners. I would encourage you to do your own research here and see what conclusion you reach.

Here are just a few of the reasons why multifamily is better….and why you should buy as many units as you can with your available cash...we’ll look at a realistic scenario on possible outcomes if you have $50,000 to invest with the option of investing in a SFR, duplex, or 4-unit.

A PERSONAL STORY...

When I was first starting out in 2011 I was flipping properties...using bank funding and performing all the work myself...it sucked. After my last completed flip I recall having $50,000 cash and looking for another renovation project. My agent at the time asked me to look at a 3-unit property that just hit the market...it was listed at $54,000. This was a long-time family property and the seller was simply done with it. But I do rehabs, I thought...what would I do with this 3-unit?...

"I'M NOT SAYING YOU CAN'T DO WELL INVESTING IN SFR'S, BUT THE TRUTH OF THE MATTER IS THAT YOUR ODDS OF BECOMING A FULL-TIME INVESTOR LIVING OFF PASSIVE INCOME ARE EXPONENTIALLY GREATER IF YOU INVEST IN MULTIFAMILY."

It was super clean...move-in ready, but a slightly dated...and it had very little deferred maintenance....it was basically turn-key...ready for tenants. And it was in a decent location...C-class blue collar secondary market. I dwelled on this property just long enough to let someone else snatch it up.

After the fact, I realized how good of a deal this was. Out of the gate there was a $70,000+ equity position because the asking price was so low due to the seller’s motivation. As-is, the units would rent for $550/mo. each...maybe more. This deal would have generated astronomical returns and I missed the boat entirely. If I had that property today it would be paid off, generate $1,800/mo and have $150k in equity.

OK, A FEW ITEMS FOR CONSIDERATION:

INCOME GENERATION.: Multifamily property can generate greater gross income by virtue of having multiple revenue streams in the same building. Although your SFR rental will generate higher per sq.ft. rental rates, it cannot keep pace with the gross income a MF property creates.

IT'S CONSOLIDATED: After a recent summer storm, I talked to a few property owners to see how things were shaping up. It struck me quickly that the guys with SFRs spread all over the place were running the entire day, burning time, and ultimately filing multiple complex insurance claims on items like roofs and siding. I spoke to a buddy with a 30-unit building who indicated he drove over to his property, walked around the building, confirmed all was ok and went about his day. What would you rather have 30 roofs or 1 roof?
LESS EXPOSURE WHEN THERE'S VACANCY: Turning over properties is expensive. Even a light "paint and carpet" turnover will cost into the thousands. And to compound this, if you own SFR, you have zero rental income during repairs. Renovating properties, even light renovations, exposes us to risk...there are a 1,000 things that can go wrong with a renovation project resulting in cost overruns and lost revenue...

Now, consider a modest 4-unit MF property. During vacancy I can still cover my note payment comfortably with just 50% occupancy.

"AS A PROPERTY OWNER AND INVESTOR, OUR ACHILLES HEEL IS VACANCY."
COST RELATIONSHIPS: This is an important one...the relationships to value in MF properties are superior in every way. While it is true that SFR will generate a better per sq.ft. rental rate, MF properties have a distinct advantage across the financial metric that matters most. If you are paying $120k for a C-class SFR you are paying $120k/unit...The amazing thing here is MF properties do not follow the same cost pattern as the unit count grows; i.e. $120k/unit for that SFR turns into $75k/unit for a duplex and $50k/unit for a 4-unit.

OK, ENOUGH ABOUT THAT...LET'S LOOK AT HOW THIS WORKS