Single Family to Multifamily (Apartment) Investing, Making a Successful Transition
Published on: Friday, December 18th, 2015
“If you are not getting bigger, you are getting smaller.”
We’ve all heard the quote in business, but have you applied it to your real estate investing career?
If you’ve been investing in real estate for awhile, this article is for you. It’s time you take the next step in your investing career. It’s time to use all the knowledge you’ve learned over the years in single family investing and apply it at the next level. It’s time to go from single family to multifamily real estate investments. It’s the logical next step. It will accelerate your wealth and grow your cash flow. There has never been a better time.
Are you ready to take the next step in your real estate investing career?
Are you ready to go from single family to multifamily investing?
If so, there are a few things you need to know so that your jump has a smooth landing.
Here are 5 key differences you must know to make a successful transition from single family to multifamily investing:
- How to determine value. One big difference between single family and multifamily investing is how value is determined. Single family home value is determined by looking at sales of comparable homes. Homes can also be priced per square foot. Apartments are not priced by looking at similar property sales. Multifamily property value is determined by the income it produces.
- How to read a financial statement. To be successful in multifamily investing you must know how to read and evaluate an investment property’s financial statements and understand the metrics used to evaluate them (see our article on “The Most Important Formula for Real Estate Investing“). Do you know what Net Operating Income is? Have you heard of CAP Rates? Can you calculate the cash on cash return? You must know what these mean to make a successful transition.
- How to increase or decrease property value. Creating value can be straightforward in single family homes. If you add a bathroom or granite countertops, you increase the home’s value. In commercial properties it’s not that cut and dried. If you add granite countertops, it doesn’t mean you have increased the property value. Value in commercial real estate is created by increasing the cash flow. If installing granite countertops allowed you to increase your cash flow, then it increased the value of the property. If it did not increase the cash flow, it did not increase the value. Knowing how value is increased or decreased is critical in making a successful transition into commercial investing.
- It’s up to you. In single family investing several protections, known as “disclosures,” are put in place to protect the buyers. A single family realtor or seller has to disclose if they know the home has mold or a foundation that is caving in. In commercial investing, the seller does not have to disclose everything. There is much less buyer protection. There are fewer protections for the buyer because it is assumed that the purchase is for investment purposes. It is also assumed that the investor is educated and capable of doing his own research.
- Financing is different. Single family home lending relies on the credit of the buyer. The buyer must qualify for the home loan personally. Lenders determine if they will loan money to you based on your ability to pay the loan payment for that home. In commercial property financing, the lender is much more interested in the property’s ability to pay the loan. Lenders do not expect the buyer to pay the loan payments themselves. They expect the property to be able to pay the loan payments each month. The property makes payments through the rent it receives from its tenants. The same can be said for retail, industrial, and multifamily investment properties. The lender will not finance the property if they do not think the property can support the loan payments. The lender will still look at the individual borrower, however the emphasis for the lending decision is on the investment property itself.
“If you are not getting bigger, you are getting smaller.” It applies to business as well as real estate investing. If you are ready to take the next step in your investing career, it’s time to jump from single family to multifamily investing. Knowing the key differences between single family and multifamily investing will help your leap have a soft landing.