Not everybody will follow the same path that I took. I started as an accidental landlord. I continued buying single family homes until I ran across a great deal on an 8 plex in a small town. I purchased that one and still own it. I realized the economy of scale on multifamily is huge.
Reasons to Consider Multifamily
- Economy of Scale. As I mentioned, you can scale multifamily really easily. The 8-plex has one bill for taxes, one for insurance, one for snow and landscaping. Eight single families have 8 bills for each.
- Cheaper per-unit price. It costs less to get involved in multifamily right now when looking at individual units. Single families sell for retail prices, and those have been increasing for 20 years. Try assessing the value of a single family with the income method investors use. You’ll be in the red in no time.
- Tenant relations is easier. With single family each unit is very different from the others. Working with tenants has to be tailored to each property. In multifamily, the units are comparable and working with tenants is easier. One policy in each area is all that is needed.
- Higher margins. Right now, the per-unit income after expenses is higher in multifamily, at least per square foot. Units are smaller, but rent is not much lower for a similar number of beds/baths in a single family house. Rent is lower, but that is offset by much lower expenses for that unit in the multifamily. The cash flow is larger. Now, multiply that by 8 units and you are really doing well.
How to Make the Switch
I found that my single family properties were bringing the rest down. They required a disproportionate amount of time and money to continue to run, for their meager cash flow. Sure, I was building equity, but so were my multifamily properties. Here are the steps to take to switch.
- Cash flow analysis. Take the time to look at each of your single family properties and analyze what each brings in Net Operating Income (NOI). I want you to look at this rather than cash flow because they will have different mortgage terms which will make it difficult to compare. Look back at least 3 years if you have the data. See the trajectory of the NOI. Find the poorest-performing property and get ready to drop it.
- Sell your poor performer. Determine when the lease will be up for the tenant and inform them in advance you are planning to sell. Maybe you can offer to them first to purchase it and save on agent commissions! That’s what I did. Either way, when the lease is up, prepare to fix it up for sale.
- Use proceeds as down payment. Start searching for multifamily properties. Shoot for 8- to 16-plexes. This keeps it small enough that you can self-manage and learn the ropes. Going too small means paying retail prices. Make your purchase.
- Build your policies and procedures. In multifamily you need to have a folder with all these things built. This will help you treat every tenant the same.
- Repeat. Do this for each of your single family properties as you are purchasing new ones.
- Get a property manager. If you haven’t done this yet, you should start looking. You may be a great property manager, even better than anyone you can find. But, if you keep self-managing, you are taking time away from the time needed to find and acquire new properties.
That should do it. The biggest hurdle will be cash. Maybe you have to sell more than one single family to build up the cash. Your situation may vary. If you take it step by step you’ll be a multifamily investor in a few short years.
