Investing in real estate can be a solid path to financial growth, of course you already know that or why would you be here. Many have turned to it, and for good reason, and most millionaires have real estate holdings as a major part of portfolios. After navigating our own investment journey and evaluating various property types, we've found that investing in larger multifamily properties—those with 16 units or more—yields significantly better returns compared to smaller options, like single-family homes and 4-unit properties. Now, I know what you're thinking - larger properties mean more money, which means more risk - just bear with me, read to the end, and then let me know in the comments what you think.
The Appeal of Economies of Scale
Investing in larger multifamily properties offers clear economic advantages. Larger buildings help us reduce costs on a per-unit basis, leading to better overall profitability.
In smaller properties, we often face high per-unit expenses for essential services. For instance, maintaining a single-family home can result in costs for landscaping and property management that aren't shared with anyone else. If we own five single-family homes, we pay for five separate management services, translating to higher expenses.
In contrast, a 16-unit multifamily property allows those costs to be divided among multiple units. For example, if hiring a property manager costs $1,500 monthly, the cost is $375 per unit in a 4-unit property but only $94 per unit in a 16-unit property. This significant difference means we keep more rental income in our pockets.
Increased Cash Flow & Profitability
Investing in larger multifamily properties typically results in stronger cash flow. With more rental units, we create greater income potential, which becomes crucial during market fluctuations.
Consider this: if one tenant leaves a single-family home, we lose 100% of our rental income from that property. However, in a multifamily building, losing one tenant might only reduce our income by around 6%. This stability helps us manage mortgage payments and operational costs more effectively, allowing us to reinvest and expand our portfolios quickly.
Moreover, statistics show that multifamily properties have a higher occupancy rate, often around 95%. This means that we can count on a consistent stream of income, even during market downturns, which is a significant factor in building long-term wealth.
Enhanced Risk Mitigation
Every investment carries risk, but multifamily properties can help us lower it. With more tenants in a single building, the financial risks are more evenly spread out.
In smaller properties, similar to the vacancy example above, if one tenant fails to pay rent, it greatly impacts our cash flow. However, if one or two tenants miss a payment in a larger property, we remain cash flow positive. For instance, having a diversified tenant base can ensure that a 16-unit property—10 of which remain occupied—can still cover mortgage costs.
Additionally, the demand for rentals continues to rise. According to recent data, nearly 38% of Canadians and 36% of Americans rent their homes. This trend enhances our position in the market, as more people are looking for rental options, reducing our overall risk profile.
Professional Management Potentials
Larger multifamily properties offer opportunities to hire specialized property management firms. These professionals bring expertise that benefits our investments.
With a dedicated management team, we gain access to industry knowledge for better tenant screening, timely maintenance, and addressing tenant needs. This expertise often leads to higher tenant satisfaction and longer retention rates, directly impacting our bottom line.
Furthermore, dealing with a single management company for a larger property simplifies operations. Instead of juggling different managers for multiple smaller properties, we streamline processes, making our investments easier to oversee.
We also found that smaller properties can't typically afford to have professional property management, resulting in the owner being more involved in the day-to-day operations.
Property Appreciation and Value Add Opportunities
Larger multifamily properties also tend to appreciate more rapidly than smaller units. Their location and growing rental demand contribute to this increase in value.
Investing in larger properties gives ample opportunity for "value-add" improvements. For example, by renovating kitchens or adding energy-efficient systems, we can boost property values and justify rent increases. A study indicated that well-executed renovations can increase property values by as much as 20% over a few years.
Networking Opportunities and Investing Strategies
When we invest in larger multifamily properties, we join a community of experienced investors. This setting promotes sharing strategies and insights, opening doors for potential partnerships.
These larger investments can lead to more creative financing options and collaborative opportunities. Networking helps us develop our skills, find new projects, and enhance our overall investment strategy. Learning from seasoned investors often results in more profitable ventures.
Summary of Key Benefits
Through our experiences investing in larger multifamily properties, we've seen how the advantages far exceed those of smaller properties like single-family homes and 4-unit buildings. The economies of scale, increased cash flow, lower risk, professional management opportunities, and potential for appreciation make multifamily investing an appealing option for generating income and building wealth.
As we move forward as real estate investors, we remain focused on pursuing larger multifamily properties. These investments not only promise greater returns but also provide beneficial stability, which is essential in today's ever-changing market.
Invest in knowledge, seize opportunities, and let's grow together! If you're interested in learning more, or getting involved in any of our deals please feel free to reach out by booking a call using the link below.
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