Real estate investment comes with a lot of risk and uncertainty. If you ever dealt with single-family residential properties during an economic crisis, you know for sure what I’m talking about.
Just in case you need a refresher.
The growing problem of investing in single-family residential properties
I’m not saying that you should not invest in single family homes. I personally know a few people who actively invest in single family properties and are doing quite well. As a new investor or one that is looking for a more passive strategy this may not be your best choice considering the following.
Reliance on a single source of income for the property.
Relying on a single tenant’s income is quite risky. If they loose their job and run out of savings, guess what? You’re not making any money.
What if they just don’t feel like paying because they don’t like you? You also don’t make money. While your tenant is living in your property for free until you evict them (which is a timely and expensive process depending on which state you’re in), the bank still expects their payment for the mortgage.
Imagine having 12+ mortgages that you can’t pay because of non-payment . On top of that, it’s eating into your cashflow and reserve funds which prevents you from making the repairs to keep the value of the property high.
It’s a landlord’s worst nightmare and I don’t wish this on anyone.
Management headache
Having multiple single-family properties means that you or your property manager will have to drive to each location monthly to collect rent. Which is time consuming and an extra expense to your spreadsheet.
You can easily spend several hours a week just driving when you could be talking to brokers and sponsors for your next deal.
While you’re on the road, your competitors are on the phone making “big money” phone calls.
You should also be making “big money” phone calls, not being stuck in traffic collecting rent from tenants who may or may have not be able to (or refuse) to pay you.
More landscaping
More homes equals more landscaping. If your landscaper has to travel to 12+ locations in a day, you are definitely going to pay for that.
In apartments and multifamily properties, there’s minimal landscaping in many cases. If your properties are located in a more urban areas, you can expect less landscaping. The city’s landscaping will be your yard.
When you live in a city that takes pride in its appearance, your property value will increase. In reality, you’re paying for your landscaping with your taxes which I consider a win-win.
Let’s compare 24 homes to a 24-unit apartment.
With the average monthly landscaping cost being between $100-200 a month, I’ll use $150 as the average reference point.
24 homes single-family homes: (150 * 24) * 12 = $43,200
Now comparing an apartment with modest green space which will run you about $1k-1.5k a month.
Again, expect this number to be smaller as you get closer to the city or areas with more concrete and urban development.
I’ll use $1,250 as the average point.
1 24-Unit Apartment Building: 1250 * 12 = $15,000.
What a difference!
Numbers like these can make or break a deal which affects your ability to invest into more deals to reach the cash flow you desire.
Limited repositioning value
In multi-family properties the NOI greatly inflfceses the property value. Just by raising the rent a few dollars a month and repairing a parking lot and significantly increase the value of your property. You can only go so for which a single-family home.
Single family homes rely heavily on the market and not what you do to a home. Your target market with have a stricter budget and there’s only so much they can pay and be approved for.
More difficult to get a loan for
Single-family properties are not considered “businesses”. It’s usually backed by one person (who doesn’t have all the capital to begin) and the income relies solely on another person who also can’t afford the property.
With apartments and multifamily properties, they are usually purchased by multiple high-net worth individuals who have the capital to back up the loan.
These investors are usually experience and make very calculated decisions, which is less risk on to the bank.
Banks also know that multi-family properties and apartments are usually cash-flowing during purchase because they can be sold which tenants are occupying the space.
With a single-family property,
How to Find Apartment Deals
Finding the right apartment deals is crucial to your success in the multifamily investing game. Here’s a step-by-step guide to get you started:
Build a Lead List of Brokers and Properties That Fit Your Criteria
Start by identifying brokers who specialize in multifamily properties in your target markets. Establish relationships with them, as they often have access to off-market deals that aren't publicly listed.
Networking is key here. Attend local real estate meetups, join online forums, and leverage LinkedIn to connect with industry professionals.
Make sure you clearly define your investment criteria. Are you looking for properties in a specific location? Do you have a preferred number of units or a particular property condition you're targeting?
Having a well-defined criteria will help you quickly filter out properties that don’t fit your strategy.
Run the Numbers
Once you have a list of potential deals, it’s time to dig into the financials. Use our Doorbrain CRM to streamline this process.
Input the property details and let the software calculate crucial metrics like the Net Operating Income (NOI), Cash on Cash Return, and Cap Rate.
Analyze the rent roll, vacancy rates, and historical financials.
Compare these with market averages to gauge the property's performance. Don't forget to factor in potential expenses like property management fees, maintenance costs, and capital expenditures.
Sell the Deal
If the numbers look good, it’s time to prepare your offer. Compile all your findings into a professional presentation. Highlight the property's strengths, potential for value-add improvements, and projected financial returns. This will not only help you secure the deal but also impress potential investors if you need to raise capital.
Using Doorbrain’s CRM, you can manage all your leads, track communications, and ensure you never miss a follow-up. The software also helps you keep detailed notes on each property, making it easier to compare deals and make informed decisions.
Leverage Technology for Market Research
Market research is pivotal when investing in multifamily properties. Doorbrain integrates with various data sources to provide you with up-to-date market insights. From crime statistics to economic indicators, our platform ensures you have all the information you need at your fingertips.
Use these insights to identify emerging markets with high growth potential. Areas with improving infrastructure, rising employment rates, and increasing population are often good bets for multifamily investments.
Partner with Experienced Investors
If you’re new to multifamily investing, consider partnering with experienced investors. They can provide invaluable guidance and share their network of contacts. Joint ventures can also help you tackle larger deals that might be out of reach if you were going solo.
Continual Learning and Adaptation
The real estate market is dynamic, and continuous learning is crucial. Stay updated with market trends, new regulations, and investment strategies. Attend seminars, read industry publications, and consider joining real estate investment groups.
Conclusion
Investing in multifamily properties can be a lucrative endeavor if approached correctly. By leveraging technology, building strong relationships, and continuously educating yourself, you can navigate this complex market successfully.
At Doorbrain, we're committed to supporting your journey with our comprehensive CRM tailored specifically for commercial real estate investors. From lead management to market research, our tools are designed to help you make smarter investment decisions and achieve your financial goals.
Written by
Christopher C
At
Sat Aug 03 2024