Real estate is, without a doubt, a great way to grow your wealth. You can do that through smaller 1-4 unit properties, or go big and buy bigger apartments. Some say going big is the better way to go.. The question is, is it the right strategy for you?
- Economies of Scale in Acquisition and Operation
It is rather obvious that it will take less money and time to acquire one 200-unit complex as compared to 200 single family properties. In multifamily investing, you will only have to visit, inspect, obtain financing, and close on a single property. As you can imagine, you will save a lot of effort and time.
Multifamily properties help you to realize economies of scale. Many properties under a single roof are easier to manage compared to single family houses spread out in different areas. For the individual homes spread out in different places, you will require multiple property managers, whereas with a single building you will only need one property manager.
- Forced Appreciation
The value of an investment property is based on the income that property is producing. In a nutshell, if you can increase the income the property is producing, you can increase its value. This is where forced appreciation comes into play. You can force appreciation in many ways, the most common being increasing rents and decreasing expenses – both will increase the property’s net operation income (NOI). Every $1 increase to the NOI can add roughly $8-$10 to your property’s value. These little increases add up pretty quickly!
- Risk is spread over multiple units
When you have a single family home and it is vacant for some months, you are left with a 100% vacancy for those months – leaving you to cover principal, interest, taxes, insurance, and any other holdings costs. On the other hand, if you have a 200-unit complex and 10 tenants vacate, you’re only at a 5% vacancy with 190 tenants continuing to pay the expenses.
I’m not talking about debt leverage – although there is very good financing for multifamily. When I say leverage, I’m talking about leveraging your network.
Let’s say we measure the results of 5 investors over a 3 year period. They might be able to purchase 150-200 combined SFRs working independently. With large Multifamily, the same 5 investors, working together, should be able to acquire 3,000-5,000 units in the same time frame.
The reason this is, Multifamily is a team sport. And a successful team is made up of:
- Other People’s Knowledge/Experience – Someone with Knowledge or Experience
- If you want to qualify for a loan on your first apartment purchase, you’ll need someone with experience to sign on the loan with you.. otherwise, the bank will not fund the loan. It’s usually not that difficult to find someone willing to do this if you have a good opportunity, because it’s a great way for someone with a large portfolio to acquire more doors with less effort.
- Other People’s Time – Identifying the right opportunity, securing the contract, getting through due diligence, then operating it takes a lot of time and effort. If you don’t have the time but might have the experience or capital, this is a great way to participate in an apartment deal.
- Other People’s Money – If you don’t currently have liquidity or cash, but have time and experience, this is a great way to participate. You will first need to find a good deal, have a solid team in place with a track record of success.
- Other People’s Networth – If you don’t have any of the above, but have high liquidity, you can help the team qualify for the loan by showing your liquidity. Often times, you don’t even have to use those funds – just show the proof you have it.
If you’re interested in learning more about investing in apartments, we would love to connect with you! You can always reach us at 972-696-9782 or email@example.com..