During my time as a real estate investor, I have come to favor the idea of investing in large apartment buildings over single-family homes due to three main factors. These factors consist of the number of doors, value-add, and cash flow potential, which I believe, from my personal real estate investing experiences, are critical differences when comparing the two different real estate investment types.
- The more doors, the less risk vacancy plays on your NOI
- The ability to value-add is one of the most important aspects of increasing your properties equity through multi-family real estate
- Multi-family gives investors the ability to accumulate more cash flow with lesser effect of market factors
Doors (Vacancy Risk)
If you owned a 100-unit complex and 5 tenants moved out, you are left with 95 tenanted units. Now, let’s say you own a single-family home and the tenants move out, how many tenants are left to pay you and your investment off? Vacancy is one of the riskiest aspects of investing in single-family homes (SFH), which I have experienced and learned from first hand.
With a SFH, the properties vacancy tolerance is much more extreme, as you cannot afford to lose your tenants for very long. On the other hand, the more units you own in a MF deal, the less strain gets put on your vacancy tolerance and break-even points. For example, you may calculate your break-even point or vacancy tolerance on a 100-unit deal to be 75% occupancy, which equates to 75 tenanted units. Can you have a 75% occupancy vacancy tolerance on a SFH? No, you cannot. It is either 100% occupied or 0% occupied.
Value Add (Forced Appreciation)
Value add is simply the process of finding ways to add or increase the value of the asset. With SFHs that I rented out, I made repairs but would be reticent to renovate or make more substantial changes since I did not feel I could get the value out of it when I sold. SFHs use the comparative value approach. What my neighbors home across the street sold for in the last few months (same vintage, number of rooms, etc) is about what I’ll sell mine for.
Fast forward to one of our 200 units apartment deals. Since the property valuation model is based on the income it generates more than what others have bought and sold their property for nearby, there is more control as the owner to drive or force appreciation. We would start with the vacant units first, move people into those units from the older units and then proceed with the waterfall effect of renovations to the rest of the older units. Read my article below on 28 Ideas to Increase Apartment Revenue gives a more in-depth look into ways in which you can add value to multi-family properties.
Cash Flow Potential (mortgage risk)
As I write this, I’d be hard pressed to find a SFH in our area of Austin that would cash flow much higher than 4-5%. Yet the MF apartments I’m invested in are yielding in the 8% range. Positive cash flow is the most important part of a deal, and this can be quite different in a SFH vs MF apartments.
This additional cash flow and number of doors we discussed above, provide a strong layer of protection to guard against mortgage default w/MF apartments. A great example of this was in 2009 where 1 out of 200 MF owners couldn’t pay their mortgage < .5%, but in contrast one out of 20 SFHs (or ~ 4.5%) were behind on payments.
In all, this blog highlights three key benefits that multifamily real estate has over single-family investments from my own personal investing experience. These benefits, plus many others are why I have focused on purchasing large multi-family investments. The ability to position yourself in investments that limit your exposure and risk for the long term, surviving events like 2008-2009 is a key reason I invest my money in the MF niche. See my article link below on why I like investing in apartments.