Have you thought about adding a multi-family property to your portfolio? The property in the photo above is an example of a current opportunity (as of 5/8/18) of a 5-unit property for sale for $315K with over $4,300 in monthly cash flow.
If your goal is to build up your real estate income stream, multi-family investing is a good path to get there. This blog post covers some benefits of buying a small multi-family and shares some sales trends in the Philadelphia metro area.
Often, new investors equate multi-family investing to owning a large apartment building that requires a full-time maintenance staff. That is not always the case. The definition of a multi-family property is much broader. Real estate professionals break down the multi-family asset class into three general segments:
- Plexes (2 to 4 units)– Most small investors get started here. These properties are considered as residential properties by the banks when evaluating financing options. Municipalities tend to impose similar rules for landlords of plexes and single-family rentals.
- Small Apartments (5-50 units) – Some small investors (by themselves or with investment groups) move up to invest in small apartment buildings. These properties require commercial financing which require more detailed cash flow projections. Municipalities place more requirements on how these buildings are operated and where they can be built.
- Large Apartment buildings (Over 50 units) – These properties are most often owned by larger real estate investment companies or institutional investors. The commercial financing and municipality requirements generally get more complex.
Since most small real estate investors start with 2-6 unit properties, we will cover some of the top benefits of investing in this smaller brand of multi-family property:
- More revenue opportunities – Beyond rent, you can collect revenue from providing other services to tenants such as coin-operated laundry machines, storage units, private parking spaces, and other concierge services.
- Spread risk over more units – When your cash flow is dependent on one tenant paying their rent on-time, there is more risk that your property’s income. When you own a triplex, one bad tenant does not wreak havoc on your cash flow as long as you have two other good tenants.
- More favorable financing terms – One unique opportunity for investors with a duplex or triplex is get more favorable acquisition financing by agreeing to live in one unit for a period. Not only is your tenant helping you pay your mortgage but you are able to put less money down than the traditional non-owner occupied investment property.
- Economies of sale – Labor and material costs for maintenance items can be spread over more units. If you have three single-family properties with bad roofs it will be more expensive to repair than one triplex. It is also easier to get contractors to view problems at one address vs. single-family homes scattered across town.
- Less competition – In general, there are fewer people looking at multi-families in most markets. You are also less likely to get into a bidding war to acquire the property. Your competition is likely other investors who are equally-motivated to secure a good financial deal vs. a new homeowner who may bid using more emotional factors.
If you want to pick buy a multi-family property, you have to target the neighborhoods that have the most inventory (and favorable zoning). The tables below show the areas with the most transactions from 2017 in Delaware County and Philadelphia.
2017 Multi-Family Settled Transactions (Source Trend MLS)
2017 Delaware County, PA Multi-Family Sales
2017 Philadelphia Multi-Family Sales
|19139 (West Philadelphia)||62|
|19104 (West Philadelphia)||57|
|19143 (West Philadelphia)||57|
|19120 (North Philadelphia)||50|
Top Delco Multi-Family Sales Details
|# of Sales||% Duplexes||Average Sale Px per Unit||Min Sales Px per Unit||Max Sales Px per Unit||% Cash Sales|
What about investing in single-family properties? Of course, there are plenty of reasons to invest in single-family homes, including 1) lower price entry point, 2) Multiple exit strategies, and 3) Better price appreciation. I am pro single-family investing, too.
However, I think more investors should consider BOTH single-family and multi-family investment opportunities on the quest for more financial freedom.