Real Estate is one of the most popular wealth vehicles on the planet. Did you know that almost 90% of millionaires created their wealth with real estate? It’s true, although they may be using other investment vehicles to multiply their wealth, real estate is a major factor in building and preserving one’s wealth.
In a small example, most Americans’ net worth is in their own home, although this may not be a ‘great thing’ in some people’s eyes, it shows the truth around owning real estate for the long term and its potential to appreciate over time. If you have owned a home for more than 10 years today, there is an almost ‘definite’ chance your property has majorly appreciated. I personally know plenty of people that have gained hundreds of thousands of dollars over the course of their lives, not by saving money or being a business person, but by simply holding a property for a long period of time.
Why am I telling you this? Because since these are facts, why not own more real estate? The more real estate you own, the more cashflow you have and the more equity you gain from debt paydown and appreciation potential.
There are, although, some major key differences between investing in single family houses, and investing in multifamily apartments. To clarify, multifamily apartments are considered 5 units or more, and are valued much differently than single family homes. Single family homes are valued at comparable sales. If you have a property and you are selling it, it won’t be worth much more than a similar house in the neighborhood that has recently sold. Apartments, on the other hand, are valued like a business, based on how much income it produces on an annual basis. So there are more opportunities to create value in apartment building by 1) adding physical value; renovations, amenities, etc. 2) Create more revenue streams or increase rental rates 3) reducing the operational expenses. For example, If we have a 100 unit apartment building, and increase the rents by $50 Per Unit/ Month, and are selling the property at a 5.5% Cap Rate, we just increased the value of the property by $1,000,000. That is the potential of appreciation when investing in apartment buildings.
Here are some other reasons to invest in multifamily real estate rather than single family properties:
If you have single family rental properties, each one of those properties are its own investment, if you have one month of vacancy, you have a 8.3% vacancy rate, and no cash flow for that month, while paying the mortgage. That is a loss, and it hurts.
If you have a 100 unit apartment building, which is still its own investment, you could have 5 units vacant for the entire year and only have a 5% vacancy rate, plus, you have cash flow from the other 95 units that pays the mortgage.
If you are investing in single family properties, you must have a lot of houses to affirm a property manager. For one, property management costs a lot more for single family, than multifamily, because there is less cash flow. Typically, property managers for single family properties can cost between 2-3 times more than a property manager for multifamily. Because of this, until you have a handful of properties, investors are forced to ‘self manage’, which forces you to become a landlord which is not a place to be when you are becoming a successful investor.
When investing in apartment buildings, there is enough cash flow to hire an on site property management company to oversee new and existing tenants, and to maintain the properties operations. Because of the excess cash flow, compared to single family houses, these property management companies charge up to a one-third of what it would cost to hire a property manager for a single family property. Typically, a professional property management company will cost about 5% of the income that the property produces.
When investing in single family real estate, you have one investment that typically has one tenant. Which is not going to make you wealthy anytime soon. Because of this, you will need to have a ‘plethora’ of single family houses to make it worthwhile. That means a lot of houses to manage, a lot of locations to manage tenants, a lot of roofs to repair, and a lot of lawns to cut. This is a challenging business to scale. On the other hand, investing in apartments gives you the ability to purchase 100 units (for example) with 100 tenants paying rent, under one roof, at one location, with 1 lawn to take care of. This is a scalable real estate business.
There are many other reasons that I can give you that favor investing in apartments rather than single family houses, but these are the major reasons, which is just enough.
Here are a few reasons why we have chosen Multifamily Apartments as our preferred investment vehicle.
The banks will loan 75% on Multifamily Real Estate, allowing for the purchase of $10M, with only $2.5M.
Tenants pay rent which covers the expenses, and pays dividends to the owners, monthly.
Take a 100 unit property, increase rents by $50/month, resale at a 5.5% Cap Rate = increased the value by $1M.
Apartments are less volatile and have historically outperformed the S&P 500. It is also a hard asset that is insured against fires, floods, etc. therefore, cannot be destroyed.
Tenants pay down the debt which increases your equity year or year creating long term wealth for ownership.
Real Estate depreciation is a free tax write-off that allows you to keep more investment income in your pocket.
Aside from these ‘no-brainer’ facts about multi family as an investment vehicle, the world is changing. For example, Demographics show that more people are and will be leasing rather than owning their home. Millions of aging baby boomers are more likely to move into a rental rather than owning a home. Millennials are growing older before having children therefore are delaying the home buying process. Americans are now working from home. And on top of that, the affordability of homeownership continues to be ‘out of reach’ for most Americans due to flat wages, no savings, and poor credit.
Multifamily Housing is not going anywhere.
If you are interested in learning more about our Multifamily Investment Opportunities, schedule a call with our team.