Many people have bought a home before as a primary residence. Some have bought a 2nd home or investment property. Think about all of the paperwork needed to buy a home. Loan docs, real estate docs, paystubs, insurance, utilities, appraisals, surveys, etc. It is not a quick process to close on a home and can take 30-60 days to close on a property. In multifamily, whether it is 10 units or 500 units, the process is similar to a single family purchase. While it is a bit of a longer process (closing can take up to 120 days), many of the hurdles and hoops to jump through are similar. If you buy 2 single family homes, imagine the amount of paperwork it takes. The process is doubled.
Multifamily provides an easier way to buy multiple units without having an exponential amount of paperwork.
The process to acquire insurance for single family properties and multifamily properties is not too different. It takes a little more work to get insurance for an apartment complex than a single family property, but again, the amount of work is not an exponential amount of work.
One of the main benefits in looking at multifamily is the fact that the vacancy of a good property may only be 3-5%. Tenants are always moving in and out but the turnaround process in an apartment complex usually only takes a few days to ‘turn’ a unit. The maintenance team at the apartment complex can often complete some of the tasks that need to be done to get a unit ready to rent.
In a single family rental, 3-5% vacancy would equate to 11-18 days of a unit being vacant. That is a very short timeline to clean, paint, replace broken items, and rent out a single family property.
A property management team runs the day to day of the property. They ensure the property is properly maintained and cared for.
Oftentimes in multifamily, there is a leasing agent(s) and maintenance team. These people work on the property all day long and can address issues in real time. They are able to show available units immediately, as opposed to single family, where there may be a tenant living in the single family home.
In single family homes, a property manager may only visit the property 1-2 times a year. They do not know what the property looks like, if it is being taken care of, or know of certain maintenance issues. Issues usually take longer to address because there is not a full-time maintenance person on staff. Many single family owners often handle the relationship with the tenant themselves and do not pay for a property manager.
Economies of scale
In our opinion, economies of scale are the biggest benefits of multifamily. While there are more units, the amount of work to close on an apartment complex is more work than single family, but much less on a per-unit basis.
These apartment complexes will have one loan, one insurance policy, one tax bill to pay, etc. The overall amount of work is less on a per-unit basis.
In a single family home, if a tenant moves out, there is no cash while the property is being fixed to rent. If you can get a tenant in there quickly, the rent would be prorated for the month. This can be difficult to overcome because the mortgage and bills are still due for a single family property.
In multifamily, a certain amount of units can be vacant and the property will still have cash flow due to the other units being rented.
Oftentimes, appreciation can happen naturally. Did you know you can force appreciation? Forced appreciation can happen through renovating the kitchen, new paint, replacing broken items or appliances, etc. In single family homes, you are usually going off the surrounding properties. If you buy the worst house in a neighborhood, you can improve the home price by doing some renovations. However, you are limited in the amount the property can improve.
In multifamily, you can force appreciation in a number of ways. You can renovate the units just like you can in single family homes. You can add better countertops, floors, renovate the kitchen, etc. However, you can also reduce expenses. Multifamily valuation is not based on the number of units. It is based on Net Operating Income (NOI). The NOI is the income minus operating expenses. If you increase income and/or decrease expenses, you can force appreciation.
A multifamily property with 50 units is much easier to maintain than having 50 single family properties. It is an easier process to buy 1 apartment complex with 50 units than buying 50 single family homes.