Making the jump from single-family rental properties to multi-family can seem like a daunting prospect to some investors. Instead of dealing with just one property and one set of tenants, suddenly you’re handling two, three, or even more. For someone who’s only ever dealt in single-family properties, this can take quite an adjustment.
Then there are those investors who LOVE multi-family units. They swear by them, and they’ve got reason. There’s a lot to love about properties that contain multiple opportunities for cashflow, and they can certainly help you reach your financial goals faster than if you own just one single-family home.
There are lots of pros and cons that come with multi-family investment properties, but before I list some of those, let’s be clear about what constitutes a multi-family home. Multi-family properties are those that contain two or more units under one roof. However, they can be further categorized, as some are considered residential and some commercial. Basically, it’s like this:
- Properties with two, three, or four units are small multi-family and therefore are considered residential;
- Properties with five or more units are large multi-family and are considered commercial properties.
This distinction matters when you’re determining a property’s value or taking out a loan to purchase it, among other reasons. But that’s a topic for another post. On to the pros and cons!
- Potential for increased cashflow – As I mentioned earlier, when you have multiple units, there are increased opportunities for cashflow. More units = greater potential for more money.
- One loan for multiple units – If you plan to finance your purchase, the process is streamlined because you only need to take out one loan, even though there are multiple units.
- Less emotion involved – With single-family homes, emotions tend to get in the way more than they do with a multi-family property. When you’re dealing with multiple units, it’s more about the math and making decisions that make you more money. It’s easier to separate emotion from logic with multi-family…don’t ask me why, but it is!
- Less risk – While risk is inherent with any investment property, it can be reduced with a multi-family one, especially where vacancy is concerned. When a single-family property goes vacant, you have ZERO cashflow. But with a multi-family, you’re only down one unit, rather than the entire property. There’s a buffer there that insulates you from a major financial strain, and you won’t get this with a single-family property.
- Valuation – For large multi-family properties that are classified as commercial, there’s a benefit in how they’re valued. Single-family home values are based on several factors, and one of the biggest is the surrounding properties. With a commercial property, however, surrounding properties don’t matter. What matters is the cap rate, which shows the rate of return that’s based on the expected income. This means that external factors (like surrounding properties) won’t affect the value, but internal ones (like making improvements or raising the rent) can have a major positive impact.
- Costs more – Multi-family homes generally cost more to buy than a single-family property. Makes sense, when you consider that more people will live in it and provide multiple streams of income for the owner.
- Fewer properties available – There are also fewer of these homes available to investors, which means less options for you and potentially fierce competition among investors.
- Competition is more experienced – Speaking of competition, investors who are after multi-family homes, and particularly ones that qualify as commercial properties, are generally more experienced and savvy. If you’re not quite as experienced, they might have have an edge on you when it comes to finding and negotiating deals.
- Regulations – Multi-family homes that classify as commercial also come with more regulations that you have to follow. While there are rules in place for any investment property, they become much stricter when you own a commercial property, or even a small multi-family unit.
- More complicated – Multi-family properties can be more complicated, in general. When you look at management (rent collection, tenant screening, maintenance, etc.), it becomes much more complex. You’re dealing with a larger building, more units, more people, and inevitably more issues.
Before you buy a multi-family rental property, be sure to consider these pros and cons and do your own research as well. Multi-family investing isn’t for everyone, but if you believe it is right for you, you can stand to make significant financial gains if you make smart choices.
This article is a repost from Bigger Pockets
Author: Ali Safavi
Ali Safavi is a Los Angeles based real estate investor.
Ali’s impressive executive corporate experience stretches across several household name companies, including Hewlett-Packard, Sara Lee, Levi’s, Haagen-Dazs, P&G and Disney. While at Procter and Gamble in a key brand management role, Ali led the company’s most significant and successful brand launch in Febreze Air Effects – worth $200 million in profitable revenue. Ali Safavi’s passion is real estate investing. He owns multiple cash-flowing properties across the nation, allowing him to retire before the age of 40.