Real estate is an incredibly wide spectrum. There is single family. There are mobile home parks, storage units, hotels, office spaces, and so so much more.

So, what makes multifamily so great?

In short, everyone needs somewhere to live, and multifamily has the power of scale.

Residential real estate is a powerful choice in the first place, because you are providing safe housing. It’s in high demand no matter what, because people need it. This has become even more true since the onset of Covid-19.

However, instead of getting just one door by investing in single family, it is possible to get a piece of the action in a larger deal.

50k is a very common investment amount for an accredited  investor in a syndication deal. That would possibly buy 1 or maybe 2 doors for single family.

In multifamily, you will see multiple investors come together to buy multi-million dollar properties with each individual contributing that same principle 50k.

Scenario A:

Say you manage to buy 2 single family homes with a total property value of 250,000 dollars between them.

At 2% you might be collecting 5,000 a month from your two properties. They will both need property management. This will amount to about 10% of your rental income.

There will still be utilities, capex, a mortgage, taxes, insurance, and other costs to cover on your single family homes. If you earned a return of 500 dollars in cashflow each month, that would be doing incredibly well.

This is assuming you will have tenants in your two properties 100% of the time. Single family homes are either 0 or 100% occupied.

Now, another key attraction to single family real estate is often appreciation. This is true for almost any area of real estate.

Your 250,000 dollars worth of property will range on appreciation depending on the other single family homes in the area. If the market is hot, there will be high appreciation. Yet, the general average appreciation year over year has been about 4%.

Do keep in mind that your property’s value is hinged on the values of the surrounding area. This will often limit how much additional appreciation you can force with upgrades.

Scenario B:

Instead of buying single family, you decide to find a sponsor that matches your goals and values for real estate. You invest your 50k as an LP (Limited Partner). The property your sponsor is capital raising for is worth 1 million dollars for 20 doors.

Depending on how the ultimate profits are split up between the sponsor team and the passive investors (LPs), you could make anywhere between 6-10% preferred returns. It also depends on whether the deal is following a buy and hold or value add model.

In this case, let’s say we have a largely stabilized property that your sponsor intends to buy and hold for 10 years. They have promised a 6% preferred return per year. This means you and your fellow passive investors make the first 6% of cashflow or sale value of the property before your sponsors make a penny!

After that, the returns waterfall into a 70/30 split between passive investors and the sponsor team. That means if there are 12% overall cashflow, the passive investors are getting 70% of that.

Cool thing about multifamily as opposed to single family, their 3rd party management company will only take about 3-4% of the total income.

Multifamily also offers scale. The property is appreciating against 1 million dollars as opposed to 200,000.

Plus, your sponsors will likely do things to decrease the expenses of the property, and improve the units. This more directly increases the NOI, and it is not nearly as hinged on the surrounding neighborhood.

To conclude:

While single family seems like the less risky option, that is not necessarily true. Multifamily spreads your eggs into more baskets, and is much more scalable.

Additionally, multifamily is not something only the ultra wealthy do! It is reachable with some judicious capital building.

Be sure to subscribe for future posts, so we can keep learning together. 😊