Managing real estate is not easy. Even worse when you have several properties all around. But with Multifamily Buildings, you reduce your vacancy risks and your management efforts.
Never work for your paycheck
The only way for you to have financial freedom, or financial stability, is to receive a paycheck without you needing to work for it. If you do, you are always at risk. And that’s why investors love to buy income-generating properties. They are the ultimate cash cows of any investment portfolio.
Forget about the “passive income” propaganda that’s circulating all around the World Wide Web in the past 10 years. The digital products, drop shipping, and all other models do request that you work and sell something that’s, ultimately, futile. Think about yourself: what would be the last thing you would give up? Probably the roof above your head. And that’s precisely why residential real estate is better than commercial real estate.
Look at all economic recessions and depressions. What do ALL of them have in comum? Companies go out of business and, with them, the rent of retail stores, office spaces, warehouses. In the other hand, people will always need a place to live.
But even in residential real estate you have options: condos, single family houses, or multifamily buildings (duplexes, triplexes, etc…). Well, when you buy a condo, you will be limited on your real estate business by the condo association. And will have an extra cost from them, too. If you buy a single family home, your vacancy risk is high, after all, if you lose ONE tenant, you lose them all. And that’s why the multifamily is the ultimate investment for you.
Why buy one if you can buy multiples?
A multifamily property is any real estate with more than one door. Duplexes, Triplexes, four-plexes, or a 300 units building. They all are multifamily properties. And the first beauty of it is having more than one person giving you money every month. The risk of vacancy is the primary concern of real estate investors.
Imagine putting your money in an asset that should pay you periodically, and then, that stops all of the sudden. That’s a nightmare. Not only you will lose income but will start to have expenses, like maintenance, water bills, electricity, etc. It’s a double loss. And the best way to reduce that risk is to have more tenants.. in the same property.
That’s how economy of scale works on real estate. With the same $300,000.00 you would buy a house to rent, you can buy a multifamily property with 2 or more doors. You will reduce your vacancy risk, at least, by half (and more for as much as the number of doors that you can buy), AND reduce your management costs.
By yourself, there’s a number of single family homes that you can manage. And still, to go from one to the other, you will lose a lot of time in traffic. When you buy a multifamily property, you resume your activities to that address. Time is money, and here you can save both.
When the economy is down, the rent goes up
Different from (almost) anything else during a recession of the economy, the rents tends to go up. Why? Because there is more demand. People sell their properties to avoid paying the mortgage, insurance, condo association, property taxes and maintenance (or they lose them to the banks) and start live on rent. According to the Consumer Price Index from the U.S. Bureau of Labor Statistics, in every recession the rent prices goes up higher than in periods of economic growth.
Not only that, but usually the prices of the houses also goes up during recessions. That’s what happened in 3 of the last 5 US economic slowdowns. The two here real estate prices followed the tumbling economy was when the problem was generated in the financial markets, like the Dotcom bubble in the late 90’s and the mortgage leverage bubble in 2008.
Another benefit of investing in this kind of property is the [better] appetite financial institutions (both banks and private investors) have for lending money for acquisitions and renovations. They like it and they will fund you.
Different from a single family house, a multifamily property is looked at as a business. It has incomes, expenses and (most of the times) a profit. That’s what the banks care about. Your credit situation is less relevant here and in a conventional single family, or condo, purchase. They want to know if the BUSINESS makes money and can pay for itself.
It’s not difficult to find institutions that will finance up to 80% of the acquisition price and up to 100% of renovation costs. And, after stabilization, you can refinance up to 96% of the property value. And buy a new project.
Buildings with class
In this market, you will find different classes of properties. They are classified based on:
Age of the property
Location of the asset
If you are looking for a "peace of mind” kind of investment, the CLASS A will be a great asset. They are new, what demands less maintenance; they have better amenities, which you allow you to have more expensive rents; and they have higher income tenants, reducing your default risk.
The CLASS B type of properties, are less expensive than the CLASS A, but will require some maintenance. Which is good, because as the acquisition funds you need to have NOW, the maintenance you can provide with the cash flow from the rents, making your life easier. But the upside on the property value is marginal.
Now, if you don’t mind working a little bit more, and you are looking to have a good profit, the CLASS C multifamily buildings are your target. They usually are older buildings (20 years or more), need a lot of renovation, the rents are very low, and they are located in the outskirts of developed areas. All factors that scream “MONEY”.
By renovating the property, you will be able to increase the rents, more than what you would do in the CLASS B properties. And by being located in the outskirts of developed areas, the history shows that they often gain more value. If your property is near a major metro area, as it expands, the real estate prices of the adjacent areas will go up too, and your property will be awarded with the geographic growth. Bottom line: you can make a lot of money!
So, if you have a portfolio of single family homes, try selling them and buying a multifamily property. You will have lower risks, less work and much more opportunities to increase the value of your asset.