How To Grow From Single-Family Landlord To Multifamily Millionaire

Starting with small, single-family homes is a common route for many real estate investors, whether through flipping, renting, or scouting out rentals in hot markets. This type of investment allows for hands-on learning about construction, financing, and property ownership. However, if you’ve reached the limit of what you can achieve with residential real estate rentals, you might be ready to uplevel to multifamily investing. While it may seem daunting, it’s possible to transition from a single-family landlord to a multifamily real estate investor. This post will explore the advantages and disadvantages of each, the importance of understanding how commercial versus residential properties are valued, and some methods to make the transition.

The Advantages Of Owning Single-Family Rental Real Estate

Single-family real estate investing is a popular choice for many investors due to its accessibility and familiarity. Financing is often easy to obtain, and you can typically purchase residential real estate with a low down payment, bank loan, private financing, or cash. With single-family properties, there are multiple exit options, including selling at retail, leasing to own, selling to an investor, or holding and renting out. Buying one single-family rental at a time allows for purposeful diversification, and further diversification can be achieved through different property management companies. However, despite the advantages, there are also some disadvantages to owning single-family investment properties that investors should consider.

The Disadvantages Of Owning Single-Family Rental Real Estate

Owning multiple rental properties can be both rewarding and challenging. While the income potential can be fantastic, the more properties you own, the greater the likelihood of costly repairs and maintenance. Additionally, each property comes with its own set of expenses, such as insurance, taxes, management fees, and record-keeping requirements, which can quickly become overwhelming without proper organization and assistance.

Expanding your investment strategy with single-family real estate also presents unique hindrances, such as the cap on the number of conventional loans a single person can have on their credit, and the limitation on property value determined by neighboring properties. Despite being able to increase rental income and decrease expenses, the value of a single-family property is primarily determined by comparable properties, making it difficult to increase property value beyond the neighborhood’s market.

The Advantages Of Owning Multifamily Rental Real Estate

Multifamily real estate investing differs from single-family investing in several ways, including the ability to transfer ownership of multiple units in one transaction, reducing paperwork and simplifying the process. Also, it’s easier to form and leverage a team of service-oriented trades for multifamily properties, while it’s challenging to find reliable help for each individual single-family property.

The most significant advantage of owning multifamily rental properties is the ability to control the property’s value. This is because the value of commercial property is determined by its income, which is directly related to its rental income. Moreover, property owners can control the value by reducing costs, capturing efficiencies, and adding income streams, such as installing waste-reducing showerheads and energy-efficient bulbs in all light fixtures, and providing paid lock-box options for residents. As a result, multifamily real estate owners can increase their rental income, reduce expenses, and have a direct impact on the property’s value.

The Disadvantages Of Owning Multifamily Rental Real Estate

While there are many advantages to owning multifamily rental real estate, there are also some disadvantages to consider. The most significant disadvantage is the limited exits available for the property. It can be challenging to find someone who is willing and able to purchase the property, and your sale will likely be limited to other investors or corporations.

Another disadvantage of owning multifamily real estate is the lack of diversification in both markets and property management. If you own a single property with many units, you have all your eggs in one basket. Syndications can help with this by allowing you to own a percentage of several multifamily properties instead of a single, large property.

Obtaining financing for multifamily properties can also be challenging. These properties typically have a heftier price tag, and standard lenders may not be able to finance a loan of that size on your personal credit. Establishing an LLC and creating your own credit history as a business may be necessary before qualifying for a large enough loan to finance a multifamily property.

Ultimately, the quality of your tenant base is essential to successfully owning multifamily rental property. A high-quality tenant base that consistently pays rent on time, takes care of the property, and remains loyal long-term will increase your chances of being profitable and significantly increasing the property value.

How To Transition From Single-Family to Multifamily Rental Real Estate

For those seeking to reach the next level of wealth and freedom, investing in multifamily real estate is a smart move. Stacking and leverage are two popular strategies to do so.

Stacking involves gradually increasing your real estate portfolio by doubling the number of units you purchase with each transaction. For example, instead of buying another single-family home every two years, you could purchase a duplex, then a quad, then an 8-plex, and so on. In just ten years, you could own 31 units with this method.

Alternatively, leverage involves using the earnings from your single-family investments to invest in a multifamily real estate syndication deal. For instance, if you own five single-family properties that cashflow $200 per month each, you could earn $12,000 annually to put towards a syndication opportunity. Within five years, even with capital expenditures and maintenance on your five properties, you could reach the typical minimum investment of $50,000 for a syndication deal.

Both strategies offer a path to gradually building wealth and increasing cash flow through multifamily real estate investments.

Is Becoming A Multifamily Millionaire In Your Cards?

As experienced investors in both single-family and multifamily properties, we strongly advise taking a step back to evaluate your investment goals before making any decisions. Consider whether owning and managing 31 units across five properties is right for you or if you prefer a more hands-off approach to collecting passive income.

Regardless of the path you choose, the most important thing is to align your investments with your personal, family, and financial goals. If the “Leverage” route of investing in real estate syndications interests you, we invite you to join the Onbrdige Capital.

Inside the club, you’ll gain in-depth knowledge about real estate syndication deals, receive guidance on how to embark on your first syndication deal, and connect with other like-minded investors. We are excited to assist you in achieving your investment goals!