Multifamily Investing – 7 Reasons To Invest Now
Recently on Dentaltown, a 33 y/o dentist asked for investing advice in the Finance Forum. Honestly, what he’s accomplished since opening a scratch practice was impressive.
He’s paid off his student loans, practice loans, car and house. I know doctors that get to the point that they’re laying on their death bed without accomplishing all of this.
He was being told by advisors that setting up a retirement account was the ONLY way to go but he wasn’t too keen on “locking” up his money for another 26 years.
He wanted options in case his interests changed from staring at mouths all day.
Can you blame him based on everything he’s accomplished so far?
Many doctors get to the point that they also want options. But too many choices can cause confusion and confusion leads to INACTION which is why many are hesitant to start investing in real estate.
For those that do want to pursue this type of investing, the choice comes down to either passive or active investing which we’ve discussed before:
The majority of busy professionals choose to go the passive route.
But what about the type of property?
With so many choices, how do you select the best one?
Most gravitate to single family homes when they first start investing in real estate. Why? Because it’s the most familiar. We either have grown up in a home or live in one so the thought of dealing with only one house and one tenant sounds fairly simple.
The problem you run into is when trying to scale. You can probably handle 4 or 5 on your own but what about 30?
Try running a practice full time and dealing with 30 tenants. No thanks.
Let’s take a look at one of the more popular asset classes that I’ve been personally investing in for several years…multifamily investing.
What Is A Multifamily Property?
A multifamily property is any residential property that contains more than one housing unit.
- apartment complexes
Larger multifamily properties (5+ units), fall into the “commercial real estate” category. These typically qualify for a different type of financing, which is usually more expensive than properties that are considered strictly residential.
7 Reasons Multifamily Investing Makes Sense
#1 Baby boomers are renting more
It seems the older baby boomers get, the more likely they are to rent instead of owning their homes.
A new report from Rent Cafe stated that between 2007 to 2017 there was a 43% increase in renters over the age of 60.
Also, a Forbes report showed that between 2009 and 2015, the biggest shift from homeownership to renting came from those aged 55 and older.
In a 2017 report, the National Multifamily Housing Council and National Apartment Association stated that renters aged 55 and above account for more than 30% of rental households.
You might be asking yourself, “why is this happening?”
Research shows that the older we get, the less hassles we want (I can attest to that!).
I love to mow my own yard but it’s also nice to come home from work to a neatly manicured lawn.
Boomers are more likely to rent these days not because they have difficulty purchasing a home, but rather because the right multifamily property can offer hassle-free, amenity-filled luxury living. Can you blame them?
#2 Millennials would rather rent vs. own
The national rate of homeownership for the population overall was 67.4% in 2019 and declining.
But for millennials, it was much less.
Those aged 25 to 29 was just 31% and 30 to 34 was only 45%.
For every one percent decline in home ownership, there’s 1 million new renters.
See the graphic below.
What’s causing this trend?
Several factors come into play such as:
- more millennials are graduating with higher student loan debt
- rising housing costs
Millennials are facing home prices that are 39% higher than their parents did back in the 80’s.
Another factor to consider is that millennials tend to value mobility and flexibility over the benefits of owning property.
In other words, they like to travel.
#3 Lower risk
When I made the decision to pursue passive income, real estate became the clear choice.
I learned that millionaires:
- had real estate in their portfolio 90% of the time
- averaged of 3-9 income streams
Initially I found it difficult to determine where to start so I naturally gravitated to what I was most familiar with, single family homes.
As I continued to educate myself, I began to realize the higher risk involved with investing in single family homes versus multifamily investing.
Multi-unit investments such as an apartment building have multiple units which can be used to offset a loss in rents from vacancy.
If 10% of the units are vacant, 90% are still producing income which allows the expenses to be covered.
More units = LESS risk
Once your single family rental becomes vacant, then you’re on the hook for the payments until you can get it rented again.
This is risky business especially for the newbie investor.
#4 Easier to scale
A Texas radiologist recently join the Passive Investors Circle mainly due to frustration.
He currently owns 4 single family homes and his frustration stems from the fact that he’s facing a lack of scalability.
He stated that there was “only so many calls from tenants he could take during the week.”
He realized that it was only going to keep getting MUCH worse the more homes he added to his portfolio.
Typically property expenses relating to an apartment complex is much less than someone with a portfolio of single family homes because there are multiple units under one roof.
There’s something called economy of scale which is the spreading of fixed costs over an increased number of units, such as in an apartment building.
Property taxes, insurance, and management fees are generally fixed and the cost to replace a roof on a single family home or an 8-unit small apartment building under one roof are relatively the same.
As the number of rental units increases, income is increased while reducing your cost, making it more cost-effective than multiple single-family rentals.
#5 More cash flow
One of the reasons more busy doctors are choosing multifamily investing (passive) has to do with the extra cash flow.
A single-family property generates a single monthly income whereas a multifamily property produces multiple forms of income.
Cash flow is something that author Robert Kiyosaki talks about quite frequently in his books such as:
Here’s a calculation you should familiarize yourself with:
Cash Flow = Net Operating Income (NOI) – debt – long-term repairs
If the goal is to create multiple streams of income through passive investments then multifamily investing is going to get your there much quicker than single family home rentals.
#6 Tax benefits
Multifamily investing offers the high-income earner multiple tax advantages. The top being depreciation which is a reduction in the value of an asset with the passage of time due to wear and tear.
These properties can be depreciated over a 27.5-year period, even though most typically appreciate in value. This allows investors to offset a large amount of the rental income that they collect from the property each year.
The IRS allows you to subtract these depreciation losses against the income which will REDUCE your tax burden.
For those of you that REALLY want to save big on income taxes, consider filing as a Real Estate Professional.
Related article: A Doctor’s Primer On Real Estate Professional Status
#7 Improvements unlock hidden value
The majority of our personal investments in multifamily syndications are in the value-add category.
When sponsors reinvest through capital improvements and property enhancements there’s an immediate payback because then they can command higher rents.
If renters find a greater value and receive a benefit from improvements such as appliance upgrades, smart technology and lighting improvement then they’re willing to pay more.
Ready To Get Started In Multifamily Investing?
From my experience personally investing in real estate plus educating others on this site and podcast interviews; I find that the MOST important aspect of real estate investing is just getting started.
And investing in multifamily properties is a great way to do just that.
If you’re ready to start growing passive income streams….wait, what? You only have active income? That’s not good!
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