By Patrick Grimes
Many people in the real estate world with whom I interact are interested in shifting from investing in single-family homes to purchasing multifamily dwellings.
A lot of those investors feel, as do I, that it makes more sense in terms of scalability. Think about it: Is it easier to manage 5-10 individual homes or 100 apartment units?
You can go from 0-60 with lightning speed.
Imagine being able to add properties to your investment portfolio 2, 3, even four times faster than you can with single-family homes. If you want to fatten your asset portfolio faster, multifamily investing can do that, often for less money and with less stress.
More productivity and efficiency
You might not think so, but investing in a 100-unit apartment building can be less frustrating, time-consuming, and mentally draining than accumulating 100 individual houses. If you want to create a fantastic portfolio, you must become efficient with your money and time. Multifamily helps you do so. Remember that each single family home is a different property, age, and location, with unique problems – whereas all 100 units in an apartment building were built at the same time and can be accessed without leaving that one property.
Value-adds can increase ROI (for ALL units)
With multifamily, you can get a greater return on your investment (ROI) with less effort.
For example, when you improve an apartment community by adding an amenity, you can increase rents for ALL units in that building and use that new amenity to attract better renters, too.
On the other hand, if you add an amenity to one of your single-family homes, you only increase the ROI on that particular home and not the rest. Owning a piece of 200 units is significantly easier than taking full ownership of one single family unit.
Ability to be a PASSIVE Investor
Usually, it is not cost-effective to hire an outside property manager if you only own one or two rental homes. Not having a manager means that it is YOU, the landlord, who has to deal with things such as kids flushing golf balls down the toilet, broken windows, vandalism, termites, leaky roofs, and whiny renters who complain about everything.
That gets old in a hurry.
Even if you do choose to hire a property manager for your single family home, the quality of the property manager will be lower than what you can expect in a multifamily building. Property managers for single family homes manage hundreds of properties, and pull only a small amount of income from each one. It is hard to get them on the phone or get them to go to your property because the return on their time simply does not exist for them.
With multifamily, you can more quickly build up enough assets and cash-flow to justify hiring a professional management company to deal with tenants and their issues. If you participate in a syndication run by a competent deal sponsor, you could become even more hands-off because the sponsor does all the hard work for you. The class of property management companies that you deal with for a large property is quite different. These property managers are pulling large salaries to work at and manage your project on a full-time basis, bringing their years of experience and their large networks to the table.
Investing in a syndication is a smart choice for busy professionals who don’t have the time to deal with renter problems or handle the minutiae of running an apartment complex or keeping tabs on their investment. Syndications come with a large degree of autopilot once you have chosen your sponsor and your project. On top of that, passive investors don’t have to guarantee any loans.
How do I make the transition to multifamily?
There are several ways that a single-family investor could move into the multifamily world with little to no pain.
The first thing you must do, though, is decide to do it. I mean, you can attend dozens of conventions and training sessions, listen to podcasts, read books, join meetups, and get mentored for years without learning even half of all there is to know about multifamily.
You will realize you cannot learn it all and will have to step off the edge and into the fray. It’s scary, but you must believe in the concept of multifamily wholeheartedly or risk disappointment and failure.
Plan, prepare and protect
If you intend not to take advantage of syndications and want to go it alone, you should draw up an expansion plan. This plan should include protocols for evaluating prospective multifamily buildings, among other things.
I will include a more in-depth analysis of what makes for reliably profitable multifamily deals in future articles. For now, I will trot out the old carpenter’s cliché: “Measure twice, cut once.”
You cannot skimp on due diligence. It would be best if you never assumed that once you’ve decided to go the multifamily route, things will fall magically into place, and your mailbox will bulge with cash. That’s probably not going to happen. You will need to do some work and protect your money from getting sucked into a deal that will never pay off.
Jumping from a duplex to a 16 or even a 40- unit building may not seem too drastic, but you’d be surprised. It’s critical that unless you intend to be plunging toilets before sunrise that you locate the right staff, including an experienced, well-reviewed property management company, on-site manager, and maintenance personnel. And remember, syndications for multifamily buildings refer to 80+ units.
Learn to “speak multifamily.”
If you have only ever invested in single-family homes, the language of multifamily might seem overwhelming. It’s not a bad idea to spend time on YouTube, learning the basics from experienced investors. You may even want to spend money on an intensive training course or two and learn the essentials of evaluating deals. My wife and I also provide valuable free training on this site and various social media pages.
You COULD buy a duplex or triplex first, but…
Purchasing a duplex or triplex is a common first step for single-family investors who gradually want to move into the multifamily space. While lenders don’t consider buildings with fewer than five units to be “multifamily” for loan purposes, some apartment investors started their careers this way. However, they often don’t recommend that to others because it is an unnecessary step and is a much slower method of growing your real estate portfolio. Little of the experience gained in operating smaller residential duplexes or quads applies to larger multifamily complexes. You will basically have to start over to make the leap to scale into those commercial assets over 80 units. I know this because I took that path and had to start over myself. Also, you will be forced to deal with maintenance issues yourself. If you don’t like the dichotomy of tenants and toilets, you might want to skip this route.
There are many compelling reasons to switch from buying single-family rental properties to multifamily investing. (see more reasons HERE) It doesn’t have to be an overly challenging process, but you must take time to do due diligence, discover the basics, and learn through experience.
Finding the right sponsor with a proven track record investing in large enough multifamily buildings is key to making sure you have the right team to put your investment into action. Then, DO IT! Every minute you wait to start is a minute when you’re not creating wealth for your future.
Multifamily investing isn’t only for the super-wealthy; it is more accessible, fun, and lucrative than you can imagine.
Need help taking the next step? Contact me right now for a personal phone appointment. Go HERE.
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Patrick Grimes is a design engineer and CEO and Founder of Invest on Main Street, LLC. His real estate holdings include general partner ownership of a multifamily and single-family real estate portfolio valued over $146M, including 1,950+ units across the southeastern United States and Texas.
He has been active in real estate investment since 2007, including purchasing land and distressed assets, renovating them, and stabilizing them for long-term cash flow. To scale his real estate portfolio, Patrick moved from single-family to multifamily investing and founded Invest on Main Street, a private equity firm specializing in multifamily value-add projects in emerging markets.