Founder of Vive Funds, a unique multifamily investment firm specializing in curating high-quality assets for our investors.
Being a new real estate investor is not for the faint of heart. By taking the time to understand and showing a willingness to learn, one can take the mystery out of real estate investing and take advantage of rewarding opportunities. Many real estate investors start by investing in single-family properties and progress to multifamily as confidence grows. On the face of things, it looks like a safe path to traverse—but is it?
My history with real estate investing starts with my mom. She was a brilliant investor and had a successful portfolio of single-family homes in the Chicago suburbs. I naturally was attracted to this investment structure because I had a built-in mentor and started my own single-family portfolio. After seeing how much active participation the management of these properties required, I decided to branch into multifamily syndication. Then I moved from a passive investor in multifamily. I later decided to take on the challenge of being a lead sponsor on a deal. The returns coupled with the tax advantages that multifamily offered ignited a change within my entire family; we divested from single-family projects completely and only invest our money in multifamily now.
There is a natural tendency to start investing with single-family homes. There is often a comfort factor, and the investment seems straightforward and more attainable. Many people fall into being landlords by turning their former home into a rental after moving. But it’s important to note that there are many factors to consider. Some of them include:
• Financing: Banks have tightened lending requirements following the financial crisis of 2008. This crisis was caused by many things, including lax lending requirements that resulted in home buyers with questionable credit buying homes. Banks have become very selective in their lending practices. Be prepared for close scrutiny of your finances. Often, banks require much higher down payments for single-family rentals and close scrutiny of your overall financial status.
• Market: It is important to be very aware of the market when purchasing a single-family rental property. Is the property in a desirable location with respect to what attracts renters? For example, the quality and reputation of neighborhood schools, taxes, access to major employment areas and HOA restrictions are a few of the many considerations.
• Rent and renters: To ensure an investment opportunity is viable financially, scrutinize average rent prices in the area. You will then have to adjust the rent based on the quality and amenities of the property and location desirability. Quality renters are needed to protect your investment. Give thought to how you can optimize the rent potential in a short period of time. If you have a mortgage, you will have to make payments and continue maintenance regardless of whether the property is rented or not.
• Cash flow: Nonpayment of rent will disrupt cash flow, and if an investor does not have contingency money, on-time mortgage payments can be jeopardized. Sometimes renters may not pay rent for several months, and this comes at the investor’s expense. I’ve found some states, cities and counties are more landlord-friendly, while others are more renter-friendly. In some states, evictions can take place in two to four weeks, while others can take substantially longer. In this arena, time is money. Every day a renter occupies the property without paying rent, it comes out of the investor’s pocket. While rent arrears can be theoretically obtained by legal proceedings, I’ve found most owners write it off rather than spending the time and expense of a legal proceeding. Tenants who do not pay rent may also be asset-poor, making recovery unlikely.
• Unexpected expenditures: Plumbing leaks, AC and heating problems, gas leaks, sewage backups, appliance breaks, etc., are commonly encountered repair issues that can cost from a few dollars to thousands. While some minor issues can be handled when convenient, significant issues need to be addressed immediately. For example, I recently experienced an incident with a collapsed pipe in the property, which required us to quickly find an alternative place for tenants to stay along with quickly finding experts to solve the issue. Addressing incidents like this in a timely manner can be expensive.
Single-family investing does have merit on its own, especially for new investors. The cost to get into a single-family investment will be considerably lower in many areas. This is why many investors choose to start here to get their feet wet in the industry.
On the other side, managing a single-family rental property is not a “rent and forget” proposition. It constantly takes up time and effort, but it can be profitable. The magnitude of effort required to manage multiple properties is not linear. Be prepared for the expected and the unexpected. Both can be financially painful and draining.
When investing in multifamily properties, I’ve found the main difference in purchasing will be the level of scrutiny and the down payment required by financial companies. My next article will focus on investing in the multifamily market. While it can seem daunting, it is doable and, if done correctly, can be lucrative.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.