Most investors start off with houses and move up to multifamily while other investors start off with residential multifamily properties, those being 2-4 units then add to their portfolio or exchange properties into even bigger ones. There are advantages and disadvantages to both single family homes and apartment complexes. It depends on the goals you have as a real estate investor whether multifamily properties will be right for you.
Moving into investing in apartment buildings is not as difficult as it sounds and its not as easy, but is it for you? In many cases its easier to maintain and make a steady income from apartments. This is in fact their purpose as an investment. Apartments in most cases provide affordable housing while giving the investor an income stream that not only covers expenses and mortgages but has at lease a little bit of positive cash flow at time of purchase and then increases over time as rents go up and management improves.
Apartment values are more dependent on the income they provide then houses. Houses are made mostly for owner occupants. The pool of buyers will always be larger for homes then apartment buildings. When you buy a house with a similar down-payment to an apartment it will be unlikely that you will have a positive cash flow. In the Phoenix market it’s very likely that your payments will be much larger, to the tune of hundreds if not thousands of dollars greater then the income they can generate. This has been true for many years and will remain so for many more, despite the decrease in home prices in the Phoenix valley.
Appreciation vs. Income
Houses unlike apartments are more likely to appreciate because they have a larger pool of buyers while apartment buildings rely more on the income to increase value, in some cases apartment buildings can be purchased with additional value that can be derived from them in the future. These would be such things a remodeling, condo conversions, rezoning, or rebuilding.
Having a 20 apartment unit building, for instance, in one space helps keep management down, maintenance, accounting, etc.; most of these expenses can be reduced compared to houses. Your business is in one location versus 10+ houses spread around the valley. Now imagine each house being in a separate LLC vs. the 20 unit building in one LLC.
I wouldn’t go as far as to say that apartments are easier to maintain then homes because in apartment you do have a higher turnover, overall then houses but, while one house has one roof and four houses have four roof, 4 units of a fourplex have one roof, though 4 kitchens and more bathroom and more appliances.
Is it worth it?
Investing in multifamily apartments does pay. Besides the positive cash flow, you can get appreciation from them, you can force appreciation as well. Several of my clients forced appreciation from a multifamily building and I have done this with several of my buildings. There are many ways to do this, and I’ll go into it in more detail in the future, but one way to do it is to buy an apartment complex which is badly managed, with rents below market and priced accordingly. By improving management and raising rents to market rates, you increase the value of the property and your return greatly increases from the investment.
If you buy in strong rental locations you will benefit from low vacancies. I’ll go into strong rental areas in the future, but most of the centrally located neighborhoods are better then the outlying areas. This goes the same for houses.
How to you start investing in Phoenix multifamily buildings?
If your primary goal is income from properties or a combination of income and appreciation then multifamily may be for you. You can start by buying a triplex or fourplex. These are considered residential properties for lenders and have similar financing guidelines to buying homes, while apartment buildings with 5 or more units, for lenders, are considered commercial properties and abide by commercial financing guidelines. Which is better to start out with? It depends on your financing ability and your goals.
Do your research, have an open mind, don’t compare, too strongly, houses to apartments and do your numbers. All the above can be made easier by having a real estate advisor experienced in multifamily properties by your side.