You know why you are interested in investing in real estate. Now, the question is how to invest in real estate. So which is best — single-family homes or multifamily buildings? The answer is “yes!”
The U.S. rental market has gone through some pretty weird contortions over the past several years. After the infamous housing bubble burst, foreclosure was king.
Everyone scrambled to pick up an easy “deal” on a foreclosing single-family property. Many new investors thought that this was the nature of real estate investing — follow the current trends and learn by doing. It looked like “fix and flip” was the way to go. For a few people, it worked.
But many single-family owners discovered that no matter how beautiful a job they did with the flip, no matter how well they kept the costs down with cheap labor and materials, they couldn’t move the property. There were no buyers. No one had a job. No one could get a purchase loan.
Soon, those real estate investors went from flippers to accidental landlords. Single-family rental listings dominated Craigslist. But no one had a job. No one could afford to rent a single-family home. Those who could didn’t want to be living in the only occupied house on the block. Instead, these former homeowners and prospective renters moved back in with family to weather out the storm.
While the recent U.S. housing crisis was something of an anomaly, this slump reminded all of us something about real estate investing: the sometimes subtle distinction between single-family and multifamily investment properties.
Through it all, multifamily was the one area of the U.S. housing market that remained steadfast, despite the worst economic downturn in ages. Like the fairy tale of the tortoise and the hare, investors who stuck with fourplexes and apartment buildings weathered an epic storm with modest but steady gains, while unlucky single-family owners, especially those with multiple properties, raced to sell at or near break-even to stop the bleeding.
Of course, investing in real estate is not a fairy tale. It’s a science, based on cold, hard facts and numbers. So, the moral of the story, the tried-and-true mantra that you discover as you learn real estate investing, is keep your options open.
How to Invest in Homes
While single-family real estate investing offers some great positives, with easy barrier of entry being a big one, it’s a ‘put all your eggs in one basket’ sort of real estate investing. It requires more precision, and leaves less room for error. The costs of rental property management and maintenance are tried directly to one single source of income. Vacancies are more costly, and that can force a huge mistake: rushing to close a lease and winding up with a tenant from hell. Some tenants are far more destructive in the privacy of a single-family home. Things really get dicey when you try to get vendors over to service multiple single-family properties. Then, it’s like herding cats.
It’s no coincidence that most drug grow-ops are discovered in poorly-supervised single-family rentals. It’s the perfect storm. Have you ever seen what that looks like? Take a peek:
If your real estate investing experience leads you into single-family properties, be careful not to cut corners. You have to execute with precision. You will need top-notch property management, and top-notch tenants to keep cash flow, well, flowing. But cash flow isn’t the only factor. Much of the return on that investment will come through appreciation. So far, that has meant holding on until the market recovers. But once it does, you will be rewarded for your patience.
Investing in multifamily properties isn’t as warm and fuzzy as buying a house. But, with multifamily real estate investing, particularly apartment buildings, cash flow is more secure. So you have a vacancy. Big deal. You still have rent coming in. Shared amenities, like coin laundry, can add extra income streams. The maintenance and management costs can be concentrated on one location — one lawn for 16 families saves over 16 one-family properties.
Rental apartments tend to be uniform, so maintenance and leasing can be systematized for maximum efficiency. Vendors may offer lower “volume” pricing on typical maintenance calls due to the ease of access. It’s also more obvious when tenants act out, so the damage is minimized. Apartment renters are a different lot. This tenant is used to living in an apartment environment. If the rental apartments are well-managed, the tenants tend to go with the flow.
How to Start Investing in Real Estate
So which is best? As I said, the answer is “yes!”
As you learn how to invest in real estate, remember to consider all available options with open eyes and an open mind. Approach it by the numbers. That’s an important secret to real estate investing.