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Multifamily properties are buildings with more than one unit.
A multifamily could be as small as two units in a duplex or as big as thousands of units in a large apartment complex. Few people ever buy a multifamily to live in
Multifamily classification is generally split into two categories: small and large.
- Small multifamily properties are any properties that contain two, three, or four units.
- Large multifamily properties, therefore, are those with five or more units.
Smaller multifamily properties are considered “residential” to most lenders and are thus seen as no different from an SFR. Large multifamily, however, is considered commercial real estate, and the rules change drastically.
While the value of a residential property (single family or small multifamily) is determined by what the similar house down the street sold for, value on commercial property is largely determined by comparing the ROI one would achieve with that of other commercial properties down the street
Pros of Multifamily Investing
More Cash Flow Possibilities
If purchased right, multifamily properties have a likelihood of producing positive cash flow from day one. In addition, rents can be increased a small amount for each unit or expenses decreased and the ripple effect of those changes can cause huge increases in cash flow.
One Loan, Multiple Units
This is a huge benefit of investing in multifamily properties: there are fewer loans to obtain!
One Insurance Policy
When you invest in a multifamily property, you have one insurance policy on it. It’s so much easier to keep track of and manage!
Math Over Emotion
When investing in multifamily units, You are able to separate emotion from the transaction much more easily than with a single-family home. Multifamily is all about the math, the numbers!
Business, Not Hobby
Multifamily properties are designed for investors to own and management companies to run; thus, the cost of hiring such a management company is often figured into the cost of owning the property, leading to less hands-on-management by you.
Multifamily units with more than five units are not valued the same way as SFRs. Commercial properties, are valued based on the ROI they give their owners.
We rely on the cap rate to base value on. Small changes to the income can make drastic swings to the value of the property, and a savvy investor can use this to their advantage to supercharge the wealth building process.
Less Competition From Homeowners
When shopping for a single-family home, an investor is competing against tens of thousands of others looking for a home. Most of this competition is in the form of non-investors who buy property for way too much money because the front porch is “so cute” or the backyard is “perfect for Fido!” This can make competition much more difficult, because you are playing the game with a different objective! Instead, when you buy multifamily properties, you are competing with other investors, which means there is far less competition.
Cons of Multifamily Investing
First, multifamily properties typically cost much more to buy than a single-family house. This can be a barrier to entry for many people trying to get started, so multifamily is often not considered until much later in one’s investment career. That said, smaller multifamily properties have some lower down payment financing options, and larger multifamily properties often include raising money from other people.
More Management Intensive
Multifamily tenants cause more headaches than single-family tenants. They are generally more “transitional” and thus have much more drama in their lives. Multifamily properties are often managed by third parties, so the owner doesn’t need to be very involved in the management drama.
More Savvy Competition
Although there is less competition from homeowners when investing in multifamily properties, the folks you are competing against are far more sophisticated than the average homeowner. They can spot a deal just like you can and generally have a lot more capital with which to buy those deals.
Most people can easily wrap their heads around a single-family investment property, but the more units in a property (and the more expensive that property is), the more complicated it all becomes. Suddenly, you are dealing with 20 moving parts rather than just two or three.
Fewer to Choose From
Depending on where you live, there may be a lack of available multifamily properties from which to choose. While single-family homes are plentiful across the world, multifamily properties may be more sparse in your location.
Finally, when you invest in multifamily properties and raise money from others to fund it, you enter a whole new world of government regulations that dictate what you can and cannot do while raising that money. If you do it wrong, you might end up wearing an orange jumpsuit and earning $1.38 an hour serving soup to other white-collar inmates.
So, Should You Invest in Multifamily?
There is never one right path, but there may be a right path for you.
As long as you are willing to do the work and learn to run the numbers on either one, you can pursue both and buy whatever crosses your radar first.
Are you? Let me know in the comments below this post! Why do you want to invest in multifamily? Or why not?