In my previous blog posts I touched on the topics of common mistakes made by multi-family investors as well as avoiding inherent bias as it relates to multi-family investing. In this blog post I want to emphasize the main points to consider when determining if, over time, owning multi-family asset could be a better fit for your investment strategy compared to buying single-family homes.
Economies of Scale
This is the most obvious and simple benefit. It applies specifically to comparing apartment ownership versus single family rental house portfolio ownership. Simply put: more doors under less roofs. In general, you should benefit from several increased efficiencies.
Some examples that come to mind include:
- "BANG FOR YOUR BUCK": There is less cost with volume spending on capital expenses at a single location than in rental homes.
- EASE OF MAINTENANCE: You can stack work orders for an asset on a single day; your maintenance crew doesn't waste time running all over town.
- EASE OF RENT COLLECTION: It's easier to manage a single location rather than multiple (spread out) locations.
- SIMILARITIES BETWEEN UNITS: All units have similar finishes in terms of quality, age, and composition. Thus, you have consistency and simplicity of materials, repairs and mechanical components to contend with.
- RENTS: Typically, there are higher per-square-foot rents for cheaper per-square-foot prices in apartments over rented single family homes.
- SERVICEABILITY: As a landlord, you have the ability to service more tenants in fewer locations.
- SCALABILITY: It is easier to scale up in a single transaction, as opposed to the multiple individual transactions required to build a portfolio of rental homes.
The last item brings me to the second advantage...
Less work, better return on time
Purchasing a 50+ unit apartment complex requires identifying, inspecting, and closing on one asset. You are dealing with a single owner and inspections on a single property. Amassing a portfolio of rental homes requires endless hours searching for suitable candidates, not to mention a staggering amount of property visits just to identify properties you will attempt to pursue. Oftentimes you end up competing against other offers, then securing multiple deals, which will result in multiple closings, all with transactional surprises that can arise. The stunning amount saved in a multi-family transaction is time you could be focusing on growing your investment business, improving your margins, and otherwise making a better return on investment and time. Focusing all your time on acquisitions of many single assets diverts your ability to fully maximize your return.
More stable risk/reward profile
Generally speaking, your vacancies should have less of an effect on your wallet in multi-family investing. I've found it generally takes less time to lease an apartment and, depending on your location, you are less subject to seasonal vacancy. You are usually able to acquire more units for less cost as the "price per door" on apartments is usually less than half that of single-family residential. Furthermore, your cost to turn an apartment between vacancies is almost always less than that of the cost to turn a house.
Reliable Upside and Adding Value
I despise the term "value-add" as I feel it oftentimes gets thrown around and used incorrectly. That said, specifically with apartments, there is often a tremendous upside in improving a C- asset to a C+, a C+ asset to a B-, and so on. Bringing multiple units up on a rental price point through upgrades and amenities can have an enormous benefit to your bottom line. With single-family homes, you will oftentimes be subjected to the sales comps in your area, whereas apartments are valued based off of their income, which is oftentimes within your control to improve over time. That isn't to say that homes cannot have speculative upside as values increase, but apartments typically provide a more reliable baseline upon which you can control "forced appreciation" over time.
Less competition & a higher barrier of entry
There are far more "fixers and flippers" and "wholesalers" out there than ever before. They squeeze margins and make the profit potential thinner and thinner on single family homes. Don't get me wrong, the apartment space is definitely very crowded as well, but the higher barrier to entry lends itself to more favorable deals on the multi-family side.
In general, I have found you can oftentimes exert more control over your multi-family investment, benefit from better margins, and generate higher cashflow.
Those who argue for rental house portfolios would say they have a clearer exit strategy, better quality tenants, and less vacancy/management issues. I find that those arguments are the three most valid and considerable counterpoints to investing in rental homes. That said, I think it comes down to your personal strategy as well as individual style and preference. Many investors run their business in ways that would be better suited for residential single family instead of apartments and vice-versa. Regardless of your personal preference, both avenues can be leveraged effectively depending on your expectations regarding involvement level, expected return-on-investment, and initial investment amount or budget.