In my 15-plus years as a real estate investor, I have been asked the question “is multifamily a good first investment” many, many times, by many different people who are in many differing circumstances. My answer has always been and continues to be the same.
It depends on a variety of different factors. These factors include the investor’s disposition, their goals, and their experience. It depends on their financial situation and the amount of time and sweat equity they might be willing to put into an investment. It depends on the market they are trying to get into. In short, it depends on the person and where they are in their lives. It is something they have to answer for themselves.
I always tell people that the best way for them to answer this question is to compare the pros and cons of multifamily investing with the pros and cons of another type of investment they might consider, such as single-family dwellings. Put pencil to paper and make a list.
Then, think about yourself, your goals, and your financial situation to determine how the pros and cons match up to you.
To help you decide, I’ve outlined some of the basic pros and cons of multifamily investing below. I’ve also included in these pros and cons some of the advantages and disadvantages of other types of real estate investments to give you a better overall view.
More Cash Flow
Perhaps the best pro multifamily has going for it is the cash flow. Because there are multiple units, there is more cash flow. There’s not necessarily a better return on investment, but more cash flow. There is simply more cash coming into your pocket every month because you have more people paying you. A single family home, while it may offer a better return, will generally not generate as much cash.
Everything in One Place
With a multifamily property, there is only one lawn. There is only one roof. There may be only one water heater or HVAC unit. There is only one place to drive to. There is only one place to check on. In sum, almost everything is contained, which could help keep your maintenance and operating costs down. Single-family properties can be scattered all over the place. Plus, they all have the same components as multifamily properties, such as roofs and lawns; there are just more of them.
Rarely Completely Vacant
Tenants move and create vacancies. But multifamily properties are rarely ever completely vacant. This means there is always some cash flowing in, and someone is there to help prevent theft and vandalism. This is not the case with single-family properties and commercial storefronts. When they are vacant, they are empty—sometimes for a long while.
Fairly Easy to Find Tenants
Everyone needs a place to live, and as long as you invest in a decent area and have a decent property, you should be able to find rent-paying tenants. Doing this with other types of properties, such as commercial, is not always so easy.
Live in One of the Units
Living in one of the units may actually be a great advantage, especially for a first-time investor. For one thing, you can get similar types of loans for smaller multifamily buildings (duplexes, triplexes and quadplexes) as you can for single-family dwellings. This helps keep your costs down. Further, if you live in one of the units, you can count the rental income from the other units on your loan application, helping you acquire the property.
More Difficult to Finance
Multifamily properties, especially properties with five units or more, are very different from single-family properties when it comes to financing. They are considered commercial properties. Financing can be more difficult to secure. Larger down payments are often required. Interest rates are higher. The loan terms are shorter and usually include a balloon payment. These items could preclude some newer investors from being able to acquire multifamily properties.
More Difficult to Sell
The number of buyers out there for multifamily properties is much smaller than the number for single-family properties. Further, almost all of the people buying multifamily properties are investors who are looking for a good deal. So unless you have somehow increased rents or otherwise added value, do not always expect to be able to reap huge gains or get out very quickly.
More People Problems
Multifamily properties come with more tenants, and all of those tenants will have one common denominator—you. Expect the amount of people problems to rise dramatically when owning a multifamily property. Also expect differing types of people problems depending on your market and class of property you buy. Higher- and lower-end tenants each come with differing sets of circumstances and problems.
Management Expertise Required
Running a multifamily real estate investment is a business. It is NOT passive. Are you ready to be an accountant, contractor, law enforcement officer, and psychologist? If not, are you ready to hire a management company and have a completely different set of headaches?
Is multifamily a good first investment? Maybe. As I said in the opening to this post, it depends. It depends on the investor. It depends on their financial situation. It depends on their market. It depends a lot on their experience in dealing with people and running a business.
If you truly want to get into multifamily investing for the first time, with little or no experience, perhaps it is best to start small. Start with a duplex or quadplex. With these types of properties, an investor can give multifamily real estate a try and determine if it is the right fit for them. These properties are generally easier to get into, easier to finance, and easier to manage. They are also easier to get out of just in case things do not work out.