I once heard a successful real estate investor say, "The bigger the deal, the easier it is." It wasn't until I had begun to acquire a large portfolio of single-family homes this fully resonated with me.
I bought 10 properties in my first year—renovating each one of them to varying degrees to make them rent-ready and attract the highest rents. But, that was just the beginning. As I acquired a lot more the following years, I invested the same amount of time and effort into each and every one. What if I could have done it all just once, but instead acquired 10, 50, or even 200 units at a time?
I am not downplaying the benefits of investing in single family homes. I still like these, and my income from these assets is what enabled me to walk away from my high-paying corporate job. But, as our experience and networks grow, we are able to naturally progress into doing larger deals. By doing so, we also have the potential to achieve more predictable results with less time and energy.
Here are just a few of the reasons I like multifamily deals....
MULTIFAMILY PROPERTIES ARE VALUED DIFFERENTLY
Any time you finance a property, the lender is going to get an appraisal. The method employed to value commercial investment properties is more predictable and reliable than that of single-family properties. The three different methods are:
- Sales Comparison - the value of the subject property is estimated based on the sales price of similar properties in the area. This approach is heavily weighted when putting a value on a single-family home—even if it's a rental property. This is the most subjective and volatile approach. It's difficult to predict what people will be willing to pay for that same house in the future.
- Cost Approach - estimates value based on the cost of buying similar land and constructing similar improvements. This approach is typical for new construction or specific-use properties (e.g. church).
- Income Approach - value is estimated based on the financial performance of the asset. As one would expect, this approach is typically given the highest weight when evaluating a commercial investment property. So, if you know you can increase rents $100 per unit, it's easy to predict what the property would be worth assuming the same cap rate.
DIFFERENT PROPERTY MANAGEMENT STRUCTURE
If you buy a large enough property, you can benefit from on-site management who will be 100% dedicated to your property. Moreover, all income stays with the property. With single-family homes, it's typical for the management company to keep late fees, application fees, risk fees, administrative fees, and other income. With larger multifamily properties, this income stays with the property. And, considering how commercial investment properties are valued, this other income positively impacts the valuation.
MORE SOPHISICATED DEBT OPTIONS
Commercial lending is not as heavily weighed down by regulation. As such, terms are more flexible, and non-recourse financing is quite common. An investor is sized up based on their net worth and experience. Also, the lender looks to the property to bring the income to cover the debt service, as opposed to the borrower's W-2 income. So, an experienced investor—especially one willing to partner—has access to very attractive debt options.
ECONOMIES OF SCALE
Scale applies to both time and money. If you have a knack for turning properties around, why not do it all at once on a 200-unit property, rather than 200 times on 200 different properties. You can also get better pricing and terms on labor and building materials when you renovate a large number of similar units at the same location.
When I started out, I was pretty proud to say I bought 10 units in my first year. Then, I met a guy who bought 1,000 units his first year. When comparing notes, it became apparent we both invested about the same amount of time building our businesses. Obviously, he was a multifamily real estate investor, while I was primarily focused on single-family rental properties. I have since been enlightened. ;-)
ABOUT THE AUTHOR
Mark Walker has been an active real estate investor since 2004, so he brought a wealth of knowledge with him when he founded Luxmana Investments in 2011. Though he started out as a part-time investor—holding a full-time job in high tech—he fully transitioned into his passion of real estate investing in 2015.
Mark now dedicates most of his time helping new and experienced investors build wealth through residential, multifamily and commercial real estate.
Learn more about Mark and Luxmana Investments at www.luxmana.com.