Most investors, at least at the beginning of their real estate investing career, concentrate on investing in single family homes. While this is lucrative and relatively easy to get into, but if you are serious about creating more wealth and at much faster rate, then investing in multifamily apartment buildings is the best way to do it.
There are numerous advantages that investing in multifamily buildings has over single family homes:
• Cash flow: You have more units to generate your income and your expenses are divided over a larger number of units rather than just one. Cash flow on a multifamily building is always greater than of a single family.
• Lower risk: The more units you have under one roof the lesser is the risk. If you have 10 units and you lose one tenant, you still have 90% of income. However, if you lose a tenant in a single family home, you will lose 100% of your income. It does not take long to have severe annual losses.
• Lower cost per unit: The cost of acquiring the single family homes on per unit bases is disproportionally higher than each unit in a multifamily building. Usually the higher rent of a single family home still does not justify the difference in cost.
• Economies of scale: It is much more economical to maintain 10 units in one building rather than 10 single family buildings scattered all over the town.
• Property management is more feasible: The higher cash flow allows to hire a professional management company to manage the building and your tenants.
• Less competition: This also means lower prices per unit. There is much more people investing in a single family homes that multifamily. That creates additional price pressure.
• Greater appreciation: Since apartment buildings are more expensive, then when it comes the time to sell, they will generate far greater amount of appreciation at the same percentage level.
• Security: If you lose a tenant in a single family home, it will increase your chances for an empty house to be vandalized.
• Wear & tear: Single family houses typically rent to families with children and pets. This will considerably increase your maintenance expenses.
• Better value control: Cosmetic improvements and better tenant management have very direct relationship with the cash flow and the value of the multifamily building.
• Depreciation: It is a deduction available to real estate investors. It allows you to deduct the cost of assets such as building and substantial improvements to building over a period of time defined by the IRS. The cost of multifamily building can be depreciated over 27.5 years. Since the value of the multifamily building is much greater, the benefits of depreciating multifamily building are also far better than of a single family house.
Many people are under the false impression that certain money saving strategies like fix and flip, and no money down is only available when buying single-family homes. In reality, the same techniques are available when purchasing multifamily buildings. Listed above are only a few reasons as to why it is a better deal as an investor to invest in an apartment building vs. a single-family unit. Investing in multifamily, commercial real estate takes a great amount of research but also it can be extremely rewarding. Purchasing an apartment building is usually the smarter and most cost effective choice.