The time may come in your real estate investing journey when you ask yourself, “Is it time to get into multifamily housing? Am I ready?”
Well, that depends on a lot of factors, to say the least. But here are a few thoughts to help you answer this question…
The Same ‒ But MORE of the Same…
The good news is, in some respects multifamily isn’t completely different from investing in single family residences. It’s kind of the same…
You’re looking to provide individuals and families with a place to live. You’re leveraging your capital by getting a mortgage from a lender and then having your tenants pay off your loan and expenses while putting extra cash in your pocket. You’re only buying desirable properties in the most suitable locations, and renting to the best tenants (who are eager and able to pay market rents).
However, it’s definitely MORE of the same. Even with an 8-plex, for example…
You’re concerned with eight HVAC units, not just one. Eight sets of appliances, not just one. Making improvements and keeping up with maintenance on eight separate units… not just one. So it’s going to require considerably more capital just to refurbish and update on the front end, not to mention cleaning and repairing units as tenants vacate and you look to replace them. And if you’re talking about even more units, say 50 or 100… well, you do the math. It can get complicated, and expensive.
I could go on, but that one reflection should paint the picture.
So it’s a good idea to cut your teeth on single family residences. You need to walk before you run. Give yourself time to learn the ins and outs (and the ups and downs) of investing in SFRs first. Then, once you’ve mastered that and have the confidence to go to the next level, you’ll have solid foundation laid. Because there’s definitely a lot more going on than with SFRs.
And in other ways, it’s downright different. We’ll look at two.
When you get into multifamily housing, security issues become more important. It’s not that you neglect this issue completely with single family homes, it’s just that when you’ve got multiple units together in a single property, it jumps to the front of the line.
You need to consider things like security cameras, key and gate systems, intercoms, and providing for safety in public areas like laundry rooms or pools and tennis courts, depending on the property.
If you’re purchasing a property that already has these in place, you’ll need to assess them. Are they adequate? Do you need to update or even replace them? And then there’s the ongoing cost of maintaining and updating security systems…
These security-related questions and issues don’t have to be overwhelming ‒ you just need to expect that you’ll have to deal with this stuff.
Caveat emptor (Latin for “Let the buyer beware”) is always sound advice in the world of real estate. It means that it’s the buyer’s responsibility to check the quality and suitability of goods before a purchase is made ‒ and this is especially so when looking to invest in multifamily housing.
Just to take one example… forget the pro forma supplied by the seller. You want to understand the property’s operating history. And that will probably take some work on your part, because the seller may not be giving you the whole story.
So, with rent rolls: you want to go unit by unit and establish which ones are vacant, which ones are leased, on what terms they are leased… and uncover any discrepancies between what tenants are supposed to pay and what they are actually paying. That is, are there any delinquencies, or have any notices to vacate been served? You’ll need to demand written documentation.
For that matter, you want to get proof of deposits in the form of bank deposit statements. Because it doesn’t matter how much was supposed to have been collected for deposits ‒ it matter how much was actually collected.
Understand also that it can be complicated to run rent projections on larger multifamily properties. You have to pick a valid vacancy rate… wisely estimate how quickly you can move rents towards market rates, account for different lease periods and rates (maybe 30% of tenants have 6-12 months left at rate A, 25% have 12-24 months left at rate A, another 20% have 12-24 months left at rate B, etc.), and so on. It’s not impossible by any means. But there’s a lot more to it than is required for a single family residence.
One Step at a Time
It’s ultimately up to you to decide if and when you’re ready to move into multifamily. But, like I said earlier, you need to walk before you run. So give yourself time to learn the ins and outs of investing in SFRs. Get really good at it. Use it to grow your net worth. Then, if you decide to go to the next level, you’ll be ready.
Give us a call at (801) 990-5109 or schedule your free appointment here to build a personalized Wealth Plan. We’ll help you invest in real estate… single- or multifamily… the right way ‒ that’s proven to work and realistic for where you are today. You’ll discover why we’re so passionate about helping our clients grow their financial and lifestyle freedom by investing in real estate.