Investing in multi family buildings can be one of the safest assets for your money – and it should be no surprise that real estate investing creates more millionaires than ANY other business (multi family buildings specifically). But why should you invest in multi family buildings as opposed to the more common strategy of single family homes?
Why Multi Family Buildings Are The SAFEST Real Estate Investment
Investing in single family homes is without a doubt easier. The tenant quality is MUCH higher, it’s simpler to understand as we can all relate to a residential home, and it’s much more forgiving. If you happen to make a mistake on one of your properties, it’s unlikely that you’ll lose your shirt (and everything else you own!).
The game is played at a much smaller level – especially financially.
Now it’s not to say that investing in single family real estate is useless, far from it! These properties should definitely be a part of your portfolio as well!
They are your bread and butter.
Something you can rely on almost every month as the tenant quality is so much higher (caveat: that is if you’re investing in the right areas).
I personally own many single family rental properties, and I always will. As I said, they’re extremely reliable.
But the REAL money is made in multi family buildings, and that’s because it’s based purely business!
Multi Family Buildings Are Built On Fundamentals
The positive of investing in multi family buildings is that you’re working with other sophisticated investor’s (properties with 6 units or more, and especially 20 units+) who also bought on fundamentals.
Remember, multi family buildings are primarily valued based off of how much income the property generates – period!
Comparables and building condition/upgrades do play a part in valuation but it really comes down to income. For example, let’s say a 15 unit building is valued at $1,500,000 in Kitchener and it’s NET OPERATING income (rental income minus all expenses – not including mortgage payments) is $65,000 a year.
This would mean that the seller is valuing their property based on a 4.3% cap rate.
But let’s say that because you’re an expert (or because you’re working with an expert real estate agent that specializes with investors – that’s me!), that they know this building is in a “B class area” in Kitchener and the condition of the building would also place is it as a “B class”. Which means the cap rate should be 6% at most (every city AND neighborhood will have they’re own Cap Rates. Expert realtors know this!).
This means that you have to calculate your offer as such – $65,000 (net operating income) DIVIDE 0.06 = $1,083,333.33
This means that the MOST you’re willing to pay is $1,083,333.33
Remember, commercial lenders (6 units or more) DO NOT CARE that the seller wants 1.5M. And they DON’T CARE if you’re willing to pay 1.5M – all their lending you money on is based on a value of $1,083,333.33 – PERIOD!
This is how investing in multi family buildings work – it’s just straight business. And that’s why it leads to positive reason number two below …
Multi Family Buildings Are LESS Volatile
Because buyers (investor’s) and banks deal and lend on such fundamentals, it’s much LESS volatile than single family during the changes in the real estate cycle.
For example, at the time of me writing this blog (February 2017) Kitchener Waterloo is in the BOOM phase of the real estate cycle. There’s no doubt about it.
And single family properties are starting to lose their fundamentals. Why? Because regular buyers and UN-sophisticated investor’s are purchasing properties based on emotions.
“I NEED this property – and I don’t care if I have to pay $30,000 over market value to get it. I WANT it!”
This starts to make it really complicating and annoying to try and buy a single family property – believe me! nothing makes sense!
This doesn’t really happen in multi family. Why?
Because the buyers are investor’s – and why would they over pay? The number one rule to investing is to MAKE money – not lose it on day one!
Especially when the lender and THIRD PARTY appraiser (another benefit of multi family investing – YOU hire a third party appraiser to guide you! The bank doesn’t send out their own), tells you “sorry you offered 1.5M, but the property is only worth $1,083,333.33 Mr. Buyer. This is what we’re lending on. If you want to pay more you better cough up the dough yourself!”
Very rarely, but there are times to over pay in multi family – but that’s for another blog.
So because of these fundamentals, the multi family markets just ‘waft’ through the real estate cycles – Boom, Slump, Correction, Boom etc …
There aren’t any emotions involved to ‘screw up’ the market – per se.
Buy Multi Family Buildings In Growing Areas!
While investing in multi family buildings can be safer long term investment, it’s not for sure. Nothing in life is.
You do still need to buy based on fundamentals, and I’m not talking about spreadsheets right now …
You need to ALSO invest in cities that have strong fundamentals.
You want to invest in cities that have strong GDP growth that is growing FASTER than the provincial and national averages.
Once GDP growth is on the rise, it will lead to job growth – which will lead to population growth. THIS formula is exactly what you’re looking for!
There are many investor’s out there looking to buy ‘cheap’ buildings in smaller towns – such as northern Ontario.
The problem is, these areas aren’t growing – not now anyway. But likely not for a LONG time.
Now maybe this is what these investor’s are banking on, but I’d rather invest my money based on logic and proven results.
If an area has a diverse economy (such as Kitchener Waterloo and Cambridge), it means that it’s a little more ‘sheltered’ from impending ‘crashes’ or changes in the real estate cycles.
Because remember, the slump and corrections WILL come. It can’t always be booming.
If you want quality, you need to buy quality. There’s no short cutting or outsmarting this formula.
Investing in real estate is supposed to give you more than you put into it.
To give you more time, freedom in your schedule and definitely more finances.
The basis of this article is to be smart, sophisticated and invest based on fundamentals.
If you are very business savvy, than investing in multi family might be for you. If not, you can always partner with an expert who does know this space. Expert investor’s are ALWAYS looking for money partners. Believe me, this can be a GREAT two way street for both parties.
Taking advantage and buying both single family and multi family investment properties can do great things for your life.
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