I used to watch this show on the Discovery Channel where two special effects experts test the validity of rumors and myths. In one episode, the guys tested whether frozen chickens cause more damage than thawed chickens when shot at an airplane’s windshield. This is very important to know if you are ever flying along and encounter a frozen chicken. As a pilot myself, I can appreciate this.
It’s easy to wonder how odd rumors and myths get started or how they become entrenched in our belief systems. Maybe it starts because “a friend told me” or because an author wrote it in a book or a blog post like this one. (Moral: don’t believe anything I say until scientifically proven.)
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Multifamily and Your Road to Wealth
It’s always entertaining to read books, articles and posts on the topic of investing in multifamily properties. After all, this is how you win Monopoly — trade four houses for one hotel. This is what I did. I exchanged two houses for a 16-unit apartment complex and thus began my journey into the multifamily business almost 15 years ago.
Newer investors dream about investing in large apartment complexes and see it as hitting the big time. Seasoned investors see multifamily as the next natural step. Passive investors see multifamily as a way to earn great returns by investing passively with experienced multifamily operators. In other words, there is a lot to like about this business, and it offers something for everyone. But are there any myths, half-truths or outright lies about this business? And if so, do you know which are true and which aren’t? And are you right?
Here are five myths and rumors that tell you why you should get started in multifamily investing right away. All of these reasons are ones that I’ve read in books, heard at REIA meetings and even seen in blog posts and Forums on BP, so they must be credible. I like to under-promise and over-deliver so instead of five myths, why not give six?
- Multifamily is easy to value. The formula is simple. Net Operating Income divided by Cap Rate equals value. Presto! There is never any confusion about what the property is worth. For all of you left-brain analytical thinkers, this type of investing is made for you.
- Economy of Scale applies. You only have one roof to fix, one lawn to mow and when one tenant moves out, you aren’t 100% vacant (contrary to single-family homes). Since none of us like risk in our investments, redundancy of income makes multifamily investing completely risk-free.
- Multifamily is easy to buy and finance. Owners of multifamily are advanced in their real estate investing careers so most of them are ready to retire. When they sell, they’ll want to loan you the money to buy it. They’ll probably even want to give you 100% financing or at least carry back your down payment or just simply give you a master lease so you don’t even have to get a loan.
- Find a good deal and the money will find you. People love to invest in big deals. All you have to do is syndicate the deal, and you can buy as big of a building as you want with no money out of your own pocket.
- Everybody needs a place to live. If the economy takes a turn for the worse, tenants might stop paying their other bills, but they won’t stop paying the rent, and there is always demand to fill your units.
- You are in control of the value. When investing in single-family homes, you have to sit around waiting for the market to appreciate to realize a higher value. With multifamily, you are in control. If you want the value to go up, all you have to do is raise rents and / or cut expenses. You’ll sometimes hear this called “forced appreciation,” and it’s so easy even a kid can do it.
I’ll Share Some Secrets
So I have to ask, if this is so easy (and lucrative), why isn’t everyone doing it? Why aren’t you? In this series of articles, I’ll break down each of the six myths. Stay tuned next week for the truth on valuing multifamily real estate.
Investing in multifamily isn’t as easy as some make it seem, but it is lucrative. Just don’t count your chickens before they are hatched. And whatever you do, don’t shoot them at my plane.
Are any of these myths true? Do you have any other multifamily investing myths?
Leave your comments below!