Why investing in single family residential versus multifamily housing may be more profitable.

I am a huge proponent of multifamily investing and the ability it offers its owners to achieve financial independence. However, there are several characteristics that allow single family residential to stand out above multifamily homes. This article will outline the negative aspects of multifamily investing and make the case that you can achieve financial independence through investing in single-family homes.

Let me list the negatives of multifamily and detail each one:

1.     Smaller pool of buyers

2.     Dealing with tenant turnover

3.     Escalating prices

4.     Higher level of education

5.     More costly to enter

6.     Higher maintenance costs

7.     Less diversification

Smaller pool of buyers

This first characteristic can be viewed as a positive and a negative. Competition in single-family homes can led to an increase in prices and a reduction in profits. But selling a single-family home is much easier and quicker than selling a multifamily home. The pool of buyers is smaller in multifamily, and the barriers to entry may maintain the prices lower. When the market decides to slow down, the ability to attract fewer buyers will affect the prices in a negative way. With single-family homes, there will be owner occupants who will always need a place to live, and you can also turn to investors to sell.

Dealing with tenant turnover

Tenant turnover is one of the highest costs for a multifamily operator. Turnover can be minimized with excellent customer service and a superior product, but there will always be a level of turnover in apartment investing. Single-family homes do experience less turnover and usually cater to a better quality of tenant. I understand this is a generalization and oversimplification, but most people would rather enjoy the privacy and comfort of a home over living in an apartment. Living in an apartment setting can create tension among residents.

We experience a smaller turnover in our apartments due to the type of tenant we cater to. Our tenants are typically blue-collar workers who work in manufacturing and the retail sector. For the most part, many of them do not look to purchasing a home. But if the job market weakens or if home buying becomes affordable, we will undoubtedly lose more tenants.

Escalating Prices

This characteristic is prevalent in the entire real estate sector, but multifamily is currently leading the charge. We have seen the national cap rate drop to around 5.7, and money continues to rotate into the sector. What troubles me is the fact that some foreign investors are foregoing yield for capital preservation. I guess they just want to keep their money safe, which does not bode well for us value investors. Although foreign investment has slowed a bit, it continues to drive up prices.

Another troubling sign is the escalating stock market. Investors have turned to multifamily to chase returns, just as they did to single-family homes back in 2008-2011. These investors are also bidding up the prices and making it difficult for smaller operators to uncover deals.

Higher Level of Education

The prevailing thought is that multifamily investing is more complex than single-family homes. There may be some truth to that, but any successful single-family home investor has spent countless hours educating themselves on their craft. I think people can relate to buying a home, and there is a certain level of comfort. Once you mention apartment complex, the limiting beliefs begin to fly.

Multifamily investing warrants an investor to become an expert in the space, and material is far less than in single-family homes. Some of the concepts can be regarded as high level, but anyone has the ability to learn the tools. Nobody was born an expert in multifamily.

More Costly to Enter

The amount of capital needed to invest in multifamily investing varies, but no one can argue that you need more capital than you do to buy a single-family home. The financing is also more expensive, along with capital repairs. Fortunately, once an investor becomes savvy, who is to say that he needs any of his own capital to invest? An investor can employ owner financing, raise private money, or even seek out multiple partners to buy a property. But for new investors who do not have these skills in their toolbox, having to raise money for the down payment is a huge impediment to entering the niche.

Higher Maintenance Costs

In certain instances, tenants are required to maintain their single-family homes by performing maintenance. In multifamily, the operator is required to cut the grass, clean the breezeways, fix the laundry machines, clean the pool, etc. These operating expenses can add up and are necessary to stave off tenant turnover. The tenants in single family residential usually maintain the yard and pay their own utilities. 

Less Diversification

When you purchase a 30-unit complex, all 30 units are located in one area. We view this as a positive, but there can be negative consequences. What happens if the path of progress decides to take a turn, and your neighborhood becomes less desirable? You are pretty much stuck with a bad situation. On the other hand, if your portfolio was diversified and you only owned a couple of homes in the neighborhood, you have just averted a catastrophe.

Find out more about multifamily units in our local Greenville area that maybe available. 

Property Management and Evictions

Eviction is one of those subjects that owners and tenants dread and feel unsure about. When it comes down to it, if both the property manager or owner and the tenant adhere to the lease, then no worries for anyone.  However, sometimes evictions become necessary. Miscommunication arise or people do not keep their word even if a signed contract is in place. This unfortunately, leaves all parties involved in an uncomfortable position. Eviction becomes necessary when the lease is not upheld by the tenant, and most often when the rent is not paid.  Leases are in place to protect both the tenants and the property owners.  If the lease is breached, then the Eviction process is in place to rectify the issues.  It allows the tenants time to correct whatever the problem is, whether it be past due rents or needed repairs, and in the event the issues are not resolved in that time frame, it gives the tenant a certain amount of time to remove themselves and their items from the property.

Most states require a legitimate reason for eviction filing. These reasons might include, illegal activity, not paying rent, damage to the property, etc. The usual form filed is called an Application for Ejectment, but there are other ways to file.  One way is an unconditional quit notice. This means that the owner is evicting the tenant without giving them a chance to fix the issue. Many notices allow you to remedy the situation in order for you to avoid eviction. However, if the tenant has repeatedly broken the lease or was involved with something such as drugs, then the owner has grounds to serve an unconditional quit notice. Which means the lease is being terminated and the tenant must remove themselves from the property immediately. If they do not, the landlord can open an eviction lawsuit.

Other types of notices involve, pay rent or quit notices and cure or quit notices. Pay rent or quit notices mean either pay the rent that is due or “quit” which means to move out and quit on the lease agreement. Cure or quit notices are when a tenant has violated the lease agreement and they are given a certain amount of time to remedy the violation (such as getting rid of an animal that didn’t meet lease guidelines) or they can quit (move). If a tenant does not choose either option with both of the notices previously listed, they can face an eviction lawsuit.  

In most states, a landlord does not need to give notice to the tenant prior to filing the eviction.  Most leases have a paragraph describing the eviction rules of a particular Landlord or Property Manager. Landlords must have cause to file. However, a tenant does have rights, and the tenant can request a court hearing and have their case heard in front of a Summary Court Judge.  If a hearing is requested, their case will be heard and things can be sorted out. The judge can then make the decision as to who is at fault and what the remedy is.

There are consequences to having an eviction filed against you the tenant.   Eviction notices can leave your renting record tarnished. If you ever wanted to buy property of your own, lenders often ask for a reference from previous landlords. So, if you are a tenant, read, understand and abide by your lease. If you are unsure of what your lease says about something, call the property manager to clarify.

If you are a landlord, have a clear and concise lease that does not leave room for a lot of questions. If you are fair and open with the tenant at the beginning of the lease, then most likely your tenants will respect you and there will be no problems during their tenancy.

Overall, eviction is a last resort action for most Landlords and Property Managers. Unfortunately, being a successful Property Manager does sometimes require these legal actions.  It is always good to know the options if problems arise. 

Top 9 Questions to Ask When choosing a Property Management Company

When looking to hire a property manager, it can be a difficult choice. The decisions they make could result in you making money on your property versus losing money. If you are unsure what questions to ask when dealing with property managers, you have come to the right place. We have listed some top questions suggested when considering to hire a property manager.

1.     How long have you been a property manager?

You don’t want to get stuck with someone who has no idea what they are doing. Make sure they have a proven track record of property management.

2.     How many units are you currently managing?

If they have too much on their plate, they will not be able to effectively take care of your needs. Magnolia Rental Property Management believes you should choose a company that handles at least 100 units. Not only does this mean they have their name out there but it also means that they should be great at handling multiple properties.

3.     How many vacancies do you have right now?

Find out how many units they have and compare their vacancies with the local market. If their vacancy rate is higher, this could be a sign that they are not very good at getting properties filled.

4.     What are your management fees?

This is, of course, a big one. Many property management companies just take a percentage of the rent. However, you want to make sure their rates are competitive.

5.     Do you charge a fee when my unit is vacant?

Ideally, you don't want to be paying for services on a house when you’re not getting rent money in return.

6.     What is your pet policy?

We all know that pets are a questionable subject because they can damage properties. You want to make sure that your investment is protected and its care is within your comfort zone.

7.     What are the income qualifications?

Evictions can be unpredictable and unpleasant as well as take up a lot of time. It’s nice to get a tenant that has a stable income without having to worry from month to month if they are going to pay.

8.     Does Your Lease Agreement Protect My Property?

Most places will use the local property lease that has been reviewed by lawyers to ensure it is covering the laws in the area. Make sure the lease requires a security deposit to cover any potential tenant damages, and it requires tenants to do certain routine maintenance items.

9.     What do your services cover?

This is perhaps one of the most important questions because you want to make sure that your money is going to good use and that all your needs are covered.  Make sure you have a good understanding about the services provided by the Property Manager you choose.  Then sit back and let them do what they are good at, which is making your investment property bring in a good income for you, the owner!