A common theme among real estate investors is the desire to start in single family before scaling up. It is a natural thought process given that many, if not most of us began our careers this way. For me, as a data entry clerk entering and tracking Import bills of lading (job no longer exists…thank you technology) or you as an entry level position in your field.
Real estate is a different animal though. I speak from experience. I have been down the BRRRR path, flipped, wholesaled, lease options, etc. For me, getting into multifamily has always been the goal; however, taking on such large transactions while transacting numerous deals a year seemed daunting. It was not until I divorced the single-family world and went to a 12-step program that it became clear.
4 Reasons the leap from Single Family to Multifamily can be done without the “experience” of single-family rentals or rehabs. And, frankly, it should be seriously considered.
The primary goal of most (if not all) landlords is 3-fold. I am going to touch on all 3 points. First, cash flow. The additional monthly income is necessary for a rental purchase is made. I made decent cashflow on my rentals. I self-managed, had a good communication with my tenants so they were long-term (not always the case), maintained properties to avoid major capex, and utilized the same handy man on my call list. We developed a low budget rental system as one can get (at least I believe so). Regardless, things happen, and tenants are going to have maintenance issues. Factoring these items in, I stayed around 6-8% cash flow annualized.
Investing as a passive investor in a multi-family syndication has similar annualized returns. The difference is, the only communication I am receiving is from the sponsorship team on how the property is performing, any issues that have come up on a macro scale, and how the property is performing vs. projections. The purpose of value-add investing is to stabilize a property: increase occupancy + increase rents. Therefore, the distributions may not be available for the first 3-6 months or may be lower than the projected returns while the capex is being deployed, property management being changed, old leases expired and new leases filed. However, once these items are completed, the passive income is truly passive. It is a check in the mail.
If anyone has ever held a rental for a few years, then sold it, they have realized that cash flow is not where the real gains occur. For the past several years, returns on all real estate have been almost hyperbolic. Cash flow on a property is great; however, appreciation on real estate is what matters. And it is more attractive in commercial real estate such as Multifamily for a number of reasons.
1. Forced appreciation making the property less susceptible to recessionary factors
2. Better terms with lenders who are attracted to these stable income producing assets
Most commercial syndications will offer a 5 year hold with 5-7% cash on cash return and a 1.9-2.2x equity multiplier. This equates to a 190-220% return on principle. What does this mean for the passive deal investor (called a Limited Partner?) This means the same $50,000 investment, a landlord of a single family property could very well do less work and earn more money. The landlord will not likely have zero calls on a property in 5 years, and if decision is to sell, there is work and additional capital to invest to reach top of market potential (again, speaking from experience). It is also advisable to use an agent (I cannot stress enough…speaking from experience) especially if you are in a W-2 position. The financial returns are real; but, so is the time commitment.
No work for me.
The management team has an entire system in place to source, underwrite, negotiate, and complete due diligence on large multifamily deals. The property will have a full management team on staff including onsite leasing agents and maintenance. Therefore, vacancy will be turned, units painted, tenants managed, toilets fixed.
As a landlord, hard money lender, and rehabber (as well as “wannabe” wholesaler), I can speak to the actual TIME commitment to finding deals which make financial sense. It is difficult to FIND the deal and there is a lag time of income in between tenants. By giving up the “CONRTOL” aspect of being a landlord of single-family properties a landlord will go from manager to investor. And, will be glad for it. Investors have opportunities presented to them in exchange for double or close to cash investment, with what equates to 1-2 hours of due diligence. It is a no-brainer. By removing the time component of trying to find a good rental, dealing with tenants and preparing properties to sell, an investor can focus on WHERE to best place available capital next and WHO has best track record.
During the 2008-2009 financial crisis, almost every asset class took a haircut in valuation. Multifamily was not alone in this. Anyone in working world and home-ownership remembers these times and is definitely on edge right now because we are seeing high asset prices (like 2007) and have concerns about a repeat. The similarities and differences are discussion for another article; but, the highlight for this section is that while VALUES of the multifamily (and other commercial sectors) were decreased, it was only temporary. The cash flow INCREASED in this time due to foreclosures displacing homeowners and increasing overall rental demand. Similar results for the self storage market as displaced homeowners needed somewhere to put their “stuff” when downsizing to apartments or smaller rental homes.
I am not a fortune teller and cannot state with certainty that multifamily assets are recession resistant; however, what is predictable is the nature of economic effects on the single-family market vs. multi-family market. We are certainly in a unique position in time with inflation, rising rates, gas prices right now; which puts us in a position to want to protect our wealth and become risk averse. However, it is important that in doing so we identify the proper placement of it for protection.