Updated: Jan 9, 2021
Whether you’re new to investing in multifamily properties or you’re a seasoned pro, there are myths floating around that many investors believe to be true. The key is to identify these myths and reveal the truth once and for all. So let’s take a look at some of the top myths that investors still think are true, and bust the misconceptions while revealing the truth.
You Need to Have a Lot of Money to Buy Real Estate
Have you seen the prices of multifamily properties lately? They’ve hit new highs, and people are doing everything they can to get their hands on one. It comes as no surprise, as people who used to purchase single-family homes are now realizing the greater potential in investing in multifamily deals. Plus, there seems to be no end in sight for the demand.
Most investors think it takes millions to get in on the action, based on the prices of these properties. But that’s a myth, because you can get in on a multifamily deal for as little as $25,000. It’s all thanks to syndication, and investing along with others to be a part of the deal. It’s a way to enjoy the monthly income and potential appreciation of a multifamily property without putting up huge sums of money, and the best part is that all of the benefits of owning a multifamily property pass on to the investors.
This includes the many tax benefits of being a part of a real estate syndication. The top benefit would be passive income tax treatment, which means that any income you earn from the property will be taxed at lower tax rates, and any appreciation in the property when it’s sold is taxed at capital gain rates, which are lower than traditional income tax rates.
There are many other benefits of investing in a multifamily property syndication, but the bottom line is you don’t have to have a lot of money to get in the game. Just find an experienced, qualified syndicator who has a successful track record and be sure to do some due diligence on the deal before investing.
New Construction Won’t Impact Your Property
This is almost a no-brainer, but many investors still think that even if there is a lot of new apartment construction underway, there will always be tenants available to rent their property. Sadly, it’s just a myth.
Whenever a market is oversaturated with apartments, there will be a problem. It’s called absorption rates - the relationship of the number of units being leased in relation to haw many are being built. Whenever absorption rates are dropping and construction is climbing, it’s a good time to stop investing in that market.
When doing your due diligence, be sure to analyze the market and see how many apartments are under construction and how many are proposed or in the pipeline. If there is a lot of development activity, it might be better to look at a different market where new construction is not planned in the near future.
It’s Easy to find Investors if you Have a Great Deal
You’ve heard this before: if you have a good deal, it’ll be pretty easy to raise money to fund the deal. After all, investors love good deals and money always follows. Well, in case you haven’t guessed - it’s a myth.
The truth is, even with the best possible deal investors simply don’t flock to fund the property, especially if they don’t know the lead sponsor. It’s up to the syndicator to build solid relationships with investors and demonstrate a successful track record of proven ability. Even then raising money isn’t a given; most investors don’t have an unlimited amount of money, and if you approach them when they’ve just invested in another property, they won’t necessarily be available to invest in yours.
It’s Easy to Control the Value of a Multifamily Property
Unlike single family properties where the market must appreciate in order to realize a higher price on a home, owners can control the value of a multifamily property simply by raising rents or cutting expenses - or both. Some investors call this “forced appreciation,” but if you believe this myth is true, I have a bridge I’d like to show you.
A multifamily property is valued simply by dividing the property’s net operating income (NOI) by the cap rate. So by raising the property’s income, you can see why many believe you could easily raise its value. The easiest way to raise income is to raise the rents. But raising the rents isn’t an easy thing to do!
The market dictates the rental rates. If your rental rate is higher than everyone else’s, you’ll have a lot of vacancies in your property. It’s hard to raise the income from a lot of empty units. Sure, there are ways to increase the income: you can fill all the vacant units with an aggressive marketing campaign. You can do some property improvements that would justify a rental increase. For example, you can start charging fees for things like preferred parking or in-unit laundry facilities.
As for lowering your expenses, you have to be careful where you cut. Don’t cut marketing expenses too much, or you’ll be scrambling to fill vacant units. You can cut utilities by installing more efficient lighting, plumbing fixtures and putting in more efficient HVAC systems. But that takes money, and it may take time to recoup that money. Other options include renegotiating your contract services, like landscaping or security patrols to get the best possible prices.
In the end, cutting expenses or increasing revenue may help when you sell, but you really can’t ”force appreciation” by juggling the NOI. It really isn’t easy to control the value of a multifamily property.
You can Enjoy Economies of Scale for Every Multifamily Property
When it comes to comparing single-family homes against multifamily properties, you often hear the argument that multifamily properties offer “economies of scale.” If you have several single-family homes as investments, there are multiple roofs to fix, multiple landscaping tasks, multiple HVAC systems that can break - well, you get the idea. With a multifamily property, there’s only one roof, one landscaping contract and one HVAC system to worry about. That’s the “economies of scale” argument, and it’s a myth.
The reality is that until you get into the 60-100+ unit range, you really won’t see economies of scale. Single-family homes are easy to manage, but if a tenant moves away, you’re 100% vacant. Multifamily properties have the advantage of a continuous stream of income from multiple tenants, making multifamily far more stable than single-family properties.
Duplexes often have higher costs because tenants tend to have higher turnover rates than single-family homes, and these tenants often don’t’ take care of the property, eliminating the economy of scale of multiple tenants.
Small multifamily properties, in the 20-60-unit range have added expenses. In some states, the property must have a “responsible person:” on premises, which means added expense to the owner. This could be in the form of a rent concession or compensation, plus paying for worker’s comp insurance.
Larger properties do have economies of scale, but vacancy can always be a problem and can negate some of the benefits. There are often units that are rented below the typical asking price, rent concessions like free monthly rent or move-in incentives to reduce vacancy rates and tenants that skip out without paying rent. Goof management can often eliminate most of the problems, but not all. Just be aware that you will have costs that hurt the economies of scale myth even in the largest properties.
Whether you’re just starting out as a passive investor or you’ve been investing in multifamily properties for years, you’ve heard or keep hearing these “statements” that are purported to be facts and truth, but in reality they’re nothing more than myths. That’s why it’s important for you to know fact from fiction when considering investing in a property. Go with an experienced syndicator, due your due diligence, and most importantly, if you have questions about the deal - by all means ask! Honest answers and good information will help you make an informed decision about your investment.
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About the Author
Ellie is the founder of Blue Lake Capital, a real estate company specializes is multifamily investing throughout the United States. At Blue Lake Capital, Ellie helps investors grow their wealth and achieve double-digit returns by investing alo