Contact Us (914) 999-2855 •

Blog Post

Advantages of Multi-Family Properties (Part 2)

Advantages of Multi-Family Properties (Part 2)

1. Scale faster

Say you want to grow your real estate portfolio by 10 units. With single-family rental properties, you’d have to find 10 separate houses. That’s 10 different sellers, 10 different inspections, and potentially 10 different mortgages. Purchase a 10-unit apartment building, however, and just like that — you’re now the proud owner of 10 rental units. Lenders might want to take a closer look under your financial hood when you’re trying to close on an MFR, but it’s potentially a lot less hassle compared to investing in an equal number of SFR units. 

2. Beneficial Economies of Scale

Continuing with the example of our 10-unit apartment building from above, there are other upsides to having all 10 units under one roof. Fix that one roof — or any other part of the building or common area — and you’ve effectively repaired all 10 units. Not only does this cost far less than renovating 10 single-family rentals, it also increases the value of all 10 at once.

Economies of scale, or reduced costs per unit, will work to your benefit in myriad issues. You only need one insurance policy. Landlords of these properties only have to drive to one location for showings, inspections and routine maintenance issues. If you hire a property management company, you only have to find and interface with staff from one company, compared to multiple if you owned several single-family rentals in different states.

On top of that, most property management companies charge less per unit to manage multi-family rentals —  typically 4-7% of the monthly gross income compared to 10% on SFRs. Want to replace the plumbing or all the windows on an apartment building? Most contractors will typically offer a better per-unit rate compared to doing the same work on individual SFRs.

3. Higher Monthly Cash Flow

Unless you own multiple SFRs, an MFR will typically translate into higher rental income.

MFR owners are also far less likely to get hit with zero rental income. If a tenant moves out of a single-family rental, it is 100% vacant. Alternatively, if a 10-unit MFR loses a tenant, it’s only 10% vacant. Even after that reduction in cash flow, you’ll still have 90% of your regular monthly rental income to cover the property’s mortgage and operating costs.

There are a few things to keep in mind, however: 

First, higher monthly cash flow does not equate to “better return on investment.” Yes, there are more renters sending you checks each month with a multifamily property. But monthly net cash flow is just one part of the equation when it comes to overall return

Second, remember that more tenants = more wear and tear. As the property ages, an increasing amount of your rental income may go towards general maintenance and upkeep costs.

4. *Sometimes* Easier to Finance

As we mentioned earlier, some lenders have a more rigorous approval process and higher rates for multifamily loans.

However, financing is complicated and individual circumstances can vary wildly — especially when you’re talking about a category as broad as multifamily properties. That said, in some cases it may be easier to obtain a loan for a million-dollar apartment building than a single-family rental home. Why? Cash flow.

Since it’s unlikely that an MFR’s cash flow would totally dry up, the risk of foreclosure is lower. Depending on how everything else checks out, in some cases a multifamily property may be a safer proposition for lenders. And because an MFR’s value is based on the income it generates (whereas an SFR’s value fluctuates with the real estate market), you may be able to secure more flexible financing and better terms on a profitable property.

5. You Can Live There Too

For many new investors, “house hacking” is one of the biggest advantages of owning a multifamily investment property. If you don’t mind living in one of the units, you can avoid paying rent somewhere else or having a second mortgage on a separate primary residence. 

The benefit can be even greater for those who plan to live in a two- to four-unit MFR. These smaller multifamily buildings still qualify for many owner-occupied, low down payment financing options, including government-backed FHA and VA loans. Borrowers can apply for FHA loans with down payments as low as 3.5% and VA loans with 0 down.

Leave a Reply

Your email address will not be published. Required fields are marked *

Related Posts