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6 Reasons to Choose Multifamily Rentals MAKING THE LEAP FROM SINGLE-FAMILY TO APARTMENT INVESTING
by Bruce Petersen, a Think Realty Resident Expert
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any real estate investors choose to own multiple single-fami-
2. SCALE If you have a large portfolio of sin- gles-family rentals (e.g.,10) you are either managing them all yourself or paying a management compa- ny roughly 10 percent of the rent to manage them for you. While 10 per- cent doesn’t sound like much, you have to consider the average profit on $1,000 rent would be about $200/ month or $2,400 per year in most markets. If you are paying someone 10 percent of the rent to manage it for you then that is $1,200 for the year which is six months profit or half of your annual profit. With a 40-50 unit you should be able to afford a part-time manager to handle it for you, which is part of your operating budget for the prop- erty. At the end of the month, your profit is yours as your payroll (man - agement) was covered in the expens- es in the monthly budget. The scale of multifamily allowed me to hire someone to handle the day-to-day operations of the business freeing me up to find the next deal and meet the next potential investor. 3. VALUATION OF THE ASSET When you buy commercial real estate/multifamily, your value is based upon the profit of the prop - erty, unlike single family, which is valued on a comparable sales (comp) basis.
ly rentals (SFR) instead of investing in multifamily properties, or apart- ments. While the viewpoint is that single family is simpler; in many ways, multifamily makes more sense. When you invest in SFRs you might see roughly $200/month in cashflow when you take in your rents and cov- er your costs. Well, the same math works in multifamily. For my portfo- lio, I generally average $200-250 per unit in cashflow. There are excep - tions to the $200/month in single family, but the same is true for mul- tifamily. Even if single family does perform better on a cashflow basis, there are many reasons to make the move to multifamily. 1. SPEED You can buy 50-100 units with one transaction as opposed to one trans- action per house. How long would it take you to buy 10 houses? A realis- tic timeline would be 5-10 years for some but even if you were to some- how do it in one year, you are likely going to go through the loan process 10 different times. When investing in multifamily prop- erties, you can buy 20, 50 or even over 100 units in one transaction. How much easier is that? One credit pull, one time to submit all your docu- ments to the lender, and one closing!
When you buy or sell a single- family home, either as an investment property or your personal residence, the value is set by looking at what other similar properties in the neighborhood have sold for. This establishes the value of your home. Multifamily, on the other hand, is valued based on its profitability or the income approach. The higher the profit, the higher the value. This is because multifamily is seen as a busi- ness and is thus valued on the amount of profit or cashflow it will generate. This leads to tremendously larger upside in multifamily. If my property is 50 percent more profitable than the same size, type, and age of prop- erty owned by my competitor across the street, then my property is worth 50 percent more. 4. LENDING IS MUCH EASIER IN MULTIFAMILY For single family, the basics are that you will need to keep your DTI (debt-to-income) in line each time you purchase a house. Additionally, if you are self-employed, it might be more difficult to get a mortgage. The lender is going to want to see W2
52 | think realty magazine :: october 2021
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