There are many reasons to make the leap from single-family to multifamily real estate investing: these investments provide scalable and consistent cash flow, tax incentives, and tend to be more resilient when things go awry.
But I’ll wager you already know all that (if not, give our blog Multifamily vs. The Stock Market: Which Is Best For You? a read.)
If you already know why you want to invest in multifamily real estate, the next step is understanding how.
The transition into multifamily investing can be daunting at first glance – but with a healthy dose of research, planning, and careful strategy, the shift can be smooth. Let’s take a look at what challenges to expect when investing in the multifamily real estate market and how to traverse those seemingly rocky waters with ease.
Single Family vs Multifamily: Understanding the Key Differences
If investing in multifamily real estate is so great, why isn’t everyone doing it?
People tend to stick with what they know, and in the case of real estate, single-family property investment is simply easier to understand. You buy one property with one mortgage and have one outcome—finance 101. In comparison, multifamily real estate seems…intimidating. The scale is bigger, and the complexities are greater. But truthfully, transitioning into multifamily real estate investing doesn’t need to be complicated; it simply requires a shift in thought. Investors need to adapt to the intricacies of overseeing a larger, more diverse real estate portfolio.
The first step in answering how to shift into multifamily real estate successfully is understanding the investment and how it differs from single-family investments.
- Scale and Complexity: One of the primary advantages of a multifamily real estate investment is scalability: in one fell investment, investors can take ownership of multiple units in a building or complex. This translates to a diversified portfolio that yields higher rents than a single-family investment. Win-win, right? However, more units means more responsibilities. Expect more complex operations, tenants to manage, and physical property to maintain. To put it succinctly, “more keys, more problems.” Recognizing the potential for risks and challenges can help mitigate and navigate any potential issues.
- Financing: Multifamily properties typically require a different financing approach than single-family homes. Instead of taking out a simple mortgage or putting down cash, investors must familiarize themselves with commercial loans, lender requirements, and the nuances of multifamily property valuation. Developing a solid understanding of these financial aspects is crucial for a successful transition into multifamily real estate.
Here are a few other ways in which multifamily real estate differs from single-family:
| Single-Family | Multifamily | |
| Cash Flow & Income | Income is generated from a single tenant renting the entire property. | Rental income is generated from multiple tenants. |
| Tenant Management | Involves managing relationships with one tenant, which equates to simpler communication and dispute resolution. | Involves managing relationships with multiple tenants.. Communication and conflict resolution skills become more complex. |
| Property Management | Investors can manage the property themselves or hire a property management service. | Due to the increased complexity of maintenance, tenant relations, and administrative tasks, larger properties often require the use of professional property management services. |
| Economies of Scale | A single unit or property means limited economies of scale; investors may face higher operational costs per unit. | Operating costs per unit can be lower due to shared infrastructure and services. This could equate to cost savings and increased profitability. |
| Vacancy Impact | A vacancy can result in a 100% loss of rental income until the property is re-leased. | Vacancies impact a smaller percentage of total income, as other units continue to generate rental revenue. |
Challenges in Multifamily Real Estate
No investment opportunity comes without challenges, and multifamily real estate is no different. The key to a successful transition into this investment space lies in recognizing potential challenges and developing a strategy to navigate them. Challenges to be aware of include:
- Tenant Management: One of the more apparent challenges when starting the multifamily real estate journey is the shift from working with a single tenant or household to managing several. Finding ways to communicate with multiple tenants and efficiently solve any issues effectively is key to overcoming this challenge.
- Regulatory Landscape: Multifamily properties often come with a more complex regulatory environment, flush with zoning laws, building codes, and compliance requirements different from those in a single-family investment. Conducting thorough due diligence is one way investors can ensure they’re informed of local regulations and avoid any legal ramifications.
- Operational Efficiency: Operating multifamily properties efficiently requires a different skill set and oftentimes requires the assistance of an official property management service. Investors can also benefit from using technology, such as property management software, which can help streamline processes and enhance operational efficiency.
Tips for a Smooth Transition
- Education: Arguably the best weapon against risk in any type of investment is education. The market, and the world, are in constant flux, and what may be true one day could radically differ the next. The best way to succeed in multifamily real estate (and frankly any other realm of investment and life) is to continuously learn about the space. Treat knowledge like compound interest and build on existing knowledge to make smarter decisions and mitigate risks.
- Network and build a strong team: There’s no need to go it alone – there are plenty of other real estate investors out there to work with and learn from. Use those resources! Attend industry events, and talk with experienced multifamily investors and other experts in the field, from property managers to accountants to legal advisors. Not sure where to start? Set up a call with us.
- Start small and diversify: When starting out in multifamily investment, there’s no need to go big or go home. Start by diversifying your portfolio with some smaller multifamily units, or even consider investing via syndication. This approach lets investors gain experience gradually and grants some breathing room for error.
- Thorough Due Diligence: Whether it’s stocks, real estate, crypto, or simply a 401k, thorough due diligence is non-negotiable when investing. In multifamily real estate, it’s crucial to evaluate potential investment properties to get a clear understanding of the investment’s potential and mitigate any existing or potential risks. It’s important to obtain as much information as possible, including:
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- Financial Records
- Property Conditions/Inspection Reports
- Rental Histories
- Market Dynamics
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- Adopt Technology: Is technology vital to successful multifamily real estate investing? No. Can technology make multifamily real estate investing 100x easier and 1000x more efficient? Obviously. From property management software to online rental platforms to communication (who doesn’t communicate online these days?), embracing technology makes it easier to liaise with tenants, manage properties, and operate efficiently.
- Risk Mitigation Strategies: In the immortal words of Scar from The Lion King, be prepared. Market downturns, unexpected vacancies, major repairs – all are part of life and all are more or less guaranteed to happen at some point in the real estate investment journey. Understand what risks could befall your investment and develop a plan for how to handle those problems when they inevitably arise.
Summary
Making the jump from single-family to multifamily real estate is a strategic move that requires careful planning and research to execute. By understanding the key differences and taking proactive steps to navigate potential challenges, investors can ensure a smooth transition and position themselves for long-term success in this dynamic investment space.
If you’re ready to start your journey into multifamily real estate, contact us today.