Discover the differences between investing in Multi-Family properties and Single Family Homes
There are 4 very important differences between investing in Single Family homes and Investing in Multi-Family properties, and these differences are described below:
Difference #1 – Trial & Error
You can ‘attempt’ to invest in single family homes, and if you make mistakes they are, in most cases, not very costly. In fact, ‘attempting’ to invest in single family properties is how you learn the process.
With multi-family properties, the ‘universe’ is not very large. This means that there are substantially less ‘players’ in the game (realtors, bankers, vendors, investors). There are also not nearly as many properties. What this means is that you will earn a reputation in your target market very quickly and this reputation (right or wrong) will precede you as you attempt to enter into transactions. So you will need to be prepared and knowledgeable about your market BEFORE you make your first offer. And more importantly you…
Difference #2 – Money
In 99% of cases of multi-family investing, you will require a substantial amount of liquid investment capital and a strong net worth statement. This can come from a combination of you and a joint venture partner or just from yourself.
With single family home investing, it is quite easy to find the money AFTER you have found the deal. In fact, some of these transactions require little or no money to complete. In addition, when investing in a single family condo or house, the downpayment and closing costs are quite low. This is very different from the multi-family investing world.
Due to the tighter time lines of due diligence and the approval process, it is extremely difficult to start hunting for a financial partner after you have found a building.
What this means is, in order to keep your reputation and to ensure that you are getting the best deals possible, you will need to have all of your partners and finances arranged up front. You (and your partner if there is one) must have your Sophisticated Investor Binder in place, you must know your financing ability, and you must know that you can close on the property on time. If you do not, and you end up not closing on a couple of properties because you really didn’t have the financial ability, you will be hard pressed to ever see another good deal come across your desk.
Now some good news:
Difference #3 – No Real Limit
Often, when investing in single family properties, an investor will hit the ‘financing wall.’ This artificial wall is created by lending institutions and is put there to limit their ‘risk’ with each investor. This fact is especially important for today’s tight lending environment. It is a basic financial calculation that tells them when they believe you are at your limit for borrowing and it doesn’t matter how good the property is that you are bringing them.
The good news is that when investing in multi-family properties, the wall is not in place. The lenders look mostly at the financial performance and potential of the building, with the lender being secondary to the equation. As long as the property fits their system, you stand a good chance to get your approval. There isn’t any artificial wall – it is completely a financial transaction. Which leads to…
Difference #4 – Business Transaction
With single family homes you are often dealing directly with someone who lives in the property and has an emotional attachment. The sale of the property is often one of the largest financial transactions they will ever undertake, and most don’t have very much experience in the ‘business side’ of real estate.
When dealing with the majority of multi-family vendors and the more experienced realtors, you will find that the discussions follow a more business-like pattern. Numbers are the key elements in the transaction and your ability to justify your offer and your terms will all boil down to business and the discussion of what is reasonable and what he banks will finance. There are many more ‘prevailing facts’ available in the multi-family investing world which help to reduce risk.
These are just four of the many key differences between investing in single family homes/condos and multi-family investing. Each style of investing has its pros and cons, each has its risks and rewards. It is often stated that an investor should really complete between 7 and 10 single family transactions before they even attempt multi-family investing. This will give the investor the foundation of knowledge, confidence, and relationships from which to build a successful multi-family portfolio.
If you’re worried about how the recent changes in Canadian mortgage rules will impact your real estate investing…looking for a safe, proven way to make the banks work for you…or even just ready to take your game to the next level…
Then it’s time to consider a jump into multi-family investing.
Multi-family investing is one of the fastest, safest ways to accelerate your portfolio for huge monthly cash flow and massive profit pay-outs — even in tight lending climates like ours — if you know how to do it right.
How to Build a 1,200 Unit Portfolio in Only 10 Years.Lessons Learned from Building a Multi-Million DollarMulti-Family Real Estate PortfolioClick here for a 60-minute interview with veteran investor Thomas Beyer. Russell Westcott and Thomas discuss many different topics of investing centred around Multi-Family investing.