This month we’re sharing why we invest in apartment buildings instead of single family homes.
Both can be great strategies and are profitable. Some of the similarities are that it’s a hard asset, everyone needs a place to live, location is still very important, and you can benefit from tax benefits. However, investing in commercial multifamily is fundamentally different than single family homes.
Here are our top 3 reasons to invest in apartment buildings:
- Scalability
There are major benefits to having scalability in real estate. One of our favorites is having consistent cash flow. If one tenant moves out of a 100-unit building, that’s a 1% loss of income. However, if a tenant moves out of a single family home, you have lost 100% of the income from that asset.
Another benefit is cheaper maintenance and repairs costs. Many apartment buildings have only a few layouts. Once you figure out the renovation scope for that layout, you can copy that same scope for the other units with the same layout! No need to try to figure out a new renovation plan each time.
Imagine having to renew 100 different insurance policies for 100 single family homes. What an administrative nightmare! Then whenever repairs are needed, a handyman needs to drive to a different location… likely in traffic. Rather, you can have one 100-unit property with one insurance policy and a handyman that can easily work on multiple units.
- Appreciation
Yes, both single family and apartments have appreciation. Yet, how it appreciates is completely different. One is based on income, and the other is based on comparable sales.
A property with 5 or more units is considered commercial multifamily. The lenders view commercial property as a business. The more it earns, the more the property is worth. If you increased rents, you just increased the value of your property.
In single family homes, the value is based on comparable sales. If a neighbor decides to sell their house for a really low price, that just lowered the value of your property. We focus on underperforming apartment buildings, dramatically increase the rents, and force the appreciation of the property.
- More Passive
Why do we target properties with 90 or more units? Because for every 40-50 units, we could afford to hire a full-time employee. That allows us to have a leasing agent and a maintenance person for every property. This makes it much easier to manage, making it more passive. Many investment firms only purchase large apartment buildings for this reason.
We see the value of investing in apartments. The biggest thing is the large barrier to entry with the purchase price, which is why we syndicate. We form a group of like-minded people to invest alongside us. Everyone receives the tax write-offs, gets to own a percentage of the property, and benefits from the strengths of multifamily investing.
Thanks for reading this month’s newsletter. Next month, we’ll highlight how it’s possible to invest in real estate using retirement accounts. We’ve done it and can share some things we’ve learned along the way.
