Multi-family real estate investments may offer the greatest return on investment for commercial real estate investors, writes commercial agent Tarun Gupta
Client Question: My partner and I own six rental houses and a duplex. We want to continue to grow our real estate portfolio. With house prices and interest rates creeping up again, should we sit tight or continue to buy more homes?
A: Single-family home prices and the cost of mortgages are on the rise again, yet incremental increases such as we are now seeing merely keep step with the economy, presenting no real threat to your investment plan nor a compelling reason to curtail your commercial real estate activities as a residential property investor. Nonetheless, in general- perhaps especially in times of rising residential prices -multi-family real estate will offer the greater return on investment (ROI). Multi-family capital costs do not tend to keep step with inflation, but stay well back from the bidding war environment of desirable residential listings, while enjoying higher returns.
Residential rental income streams can and generally do keep pace with inflation. Just look at your duplex when considering a multi-family property investment. Assuming the rental of your single family homes and the duplex are all at market rates; examine the cost per dollar ratio of each of your other holdings versus your multi-tenanted property. The cost difference between the duplex and a single-family dwelling is somewhat negligible when compared with the income streams each property yields.
No longer a 'best kept secret' amongst seasoned real estate investors, Canadian Real Estate Magazine even titled 2013 “ The Year of the Multi-Family Property,” citing predictions in the Morguard's influential 2013 Canadian Economic Outlook and Market Fundamentals Research Report. Author Keith Reading underlines, “Generally tight conditions in the rental market" and forecasts a continuous rise in rents while occupancy rates hover around 98%. The authoritative 2013 Emerging Trends In Real Estate report agrees, echoing Canadian sentiments: “The multi-family bandwagon rolls on” with “positive demographics” and a move away from suburban areas and back into increased urbanization as, “More people willingly forsake space and yards for greater convenience and avoiding car dependency.”
6 Multi-Family Facts For Investors
1 Multi-Family Properties Have Healthier Cap Rates
A desirable capitalization or cap rate is the single most important factor in gauging the investment worthiness of any rental property. Cap rates calculate a property's true net operating income then divide by its price. Properties with higher cap rates are generally more desirable investments. A cap rate of 6% and above is highly desirable, and anything in the rarified air of double digits will have investors flocking for pro forma statements. Small apartment buildings and townhouse complexes, for instance, tend to hit the highly desirable 5 - 6 %+ mark.
2 The ROI Also Rises
A multi-family property's ROI will almost always come out ahead of a single-family dwelling's for the simple reason that your cost of service will always be lower divided among additional units than when hung like a yoke upon one door. All of your costs will be lower per unit in a multi-tenant situation compared to a single-family dwelling, each requiring separate services and with individual property tax bills. Multi-family dwellings are enjoying low and lowering vacancy rates, Higher returns on investment is what every investor aspires to.
3 Multi-Family Means Multi-Rent Profits
Becoming more prized as the cash cow we all want at pasture, rolling in green, multi-family housing can provide a steady income stream that keeps cash flow ahead of and well above costs, allowing the investor to reap financial benefits by allocating profits. Five or more units is often where investors comfortably cover their margins. Build scheduled rental increases into leases written for longer than two years. Multiple rents rise exponentially, while most costs rise incrementally and predictably, each year. Reliable rents are most assured by well-maintained properties.
4 Multiple Income Streams Make Expense Sense
Rental rates depend on supply-and-demand, rising with populations, and at a faster trajectory than associated costs. A steady market for your units is a hedge against inflation and keeps your cash flow streaming in. When any cost rises, or capital outlays are necessitated, even when there are vacancies; any multi-family rental is better equipped to absorb an added expense due to multiple income streams. Even two vacancies coinciding in a five-plex can meet the mortgage in a pinch, compared to a vacant house with no income while empty and contributing nothing to its upkeep.
5 Lower Closing Costs Compared To Multiple Single-Family Homes
Every residential home you close escrow on comes with closing costs. The same applies to commercial real estate and, again, the numbers add up in favour of the multi-family investment. Closing multiple rentals as one Title versus multiple single-family properties, each with individual deeds, presents a sizable savings in capital costs.
6 Maintenance By the Numbers
While less is generally more, when it comes to maintenance, more units mean less maintenance cost per door. Contract repair and maintenance work out to a well-reviewed property management company that provides references. This could be at the outset of your career as a future land baron, or decades in. The choice is a personal one for every investor – one that will enable larger avenues of investment than when attempting to maintain every property you own yourself. Dwellings nestled together are logically easier to maintain, so will get you a better rate for service than multiple units scattered throughout a city or region.
When putting assets in the hands of tradespeople, you want to choose them carefully, so make sure their Licenses are in order, and that they have a proven track record of routine and emergency maintenance services. And, when you put your assets into the hands of any tenant, it's important to set the standard of care by example of how you expect your property to be treated. Maintenance is king when it comes to attracting and keeping quality tenants. Make every door you own yield higher profits and enjoy lower vacancy rates with consistently high maintenance standards.