Realty411 Magazine The Future of Real Estate is Here | Page 66

Multifamily Properties:
Should It Be in Your Future?
ne of the most common
questions I get is: Which are
better investments, multifam-
ily properties (apartments) or
single-family homes? My answer is, both,
but not multifamily without experienced
or qualified and experienced partners.
A multifamily property is defined as 5
units or greater, and single-family homes,
duplexes, triplexes, and four-plexes are
referred to as “1-4s”. For someone with
a goal of building a medium to large real
estate portfolio, I generally recommend
considering the inclusion of a commercial
or multifamily property with one caveat:
Don’t start by yourself and don’t put all of
your real estate working capital into one
large investment.
After purchasing and selling over 2,000
units and 12 multifamily properties over
37 years, my experience is that the best
investment property I ever owned was
a multifamily property and the worst
investment property I ever owned was a
multifamily property. These properties
have ranged from 10 units for $400K to
176 units for $10M.
Multifamily properties offer higher po-
tential reward along with higher risks. On
the surface, an apartment building seems
to be nothing more than many units, like
single-family detached homes, but in one
address, however, their proper man-
agement is a specialty. There are many
more variables and expenses than in 1-4s
including utilities, landscaping, contract
maintenance, on-site maintenance, office
management, tenant profile, advertis-
ing, lender and government inspections,
requirements, and more.
So why are the largest investors
attracted to them? For one factor, the rent
ratios are usually higher and, therefore,
the potential Net Operating Income (NOI)
and the cash-on-cash return can be higher.
In the multifamily world, rent ratios are
represented as the GRM (gross rent mul-
tiplier): The property price divided by the
annual gross income, the lower the better.
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There is also generally an efficiency of
scale for maintenance and other expenses,
and with good management, expenses are
easier and more efficient to control. The
advantage of scale best manifests itself
when the monthly income is great enough
to afford full-time, on-site management and
maintenance. For non-high end metro areas
this is usually about a $2.5M property or
higher. With a typical 60-70% loan this is a
PROS
• Potential Higher
Cash Flow
PROS
• Lower Risk
• More Liquid
• Simpler & More
Predictable
• Higher Appreciation
• Simpler, Cheaper Loans
• Avoids Current 4-10
Loan Restriction
CONS
• Higher Risk
• More Due Diligence
• More Employees
& Supervision
• More Eggs in One
Address
CONS
• Lower Cash Flow
• More Difficult to Manage
• Restricted to 10 Loans
stiff barrier to entry that may best be solved
by partnering with other experienced
investors.
And then there is the issue of the loan. In
these post crash years, getting a govern-
ment-backed loan such as from Fannie
Mae is virtually impossible in today’s tight
money market without current or signif-
icant past multifamily ownership experi-
ence. Regional banks and private lenders
may sometimes provide loans at the cost
of higher rates, shorter terms and amorti-
PAGE 66 • 2014
zation, and lower LTVs. For investors
who are “tapped out” at 10 loans for 1-4
residential properties and can’t get more
loans because of Fannie Mae loan quan-
tity restrictions, a multifamily purchase
has the advantage of not being forbidden
just because you have 10 or more loans
on 1-4s.
For an investor who would like to own
a multifamily product, but who does not

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By Tom K. Wilson
have the experience or local residency
that the lender wants, one can work with
a syndicator who can connect you with an
investor or investors who can qualify for
the loan, reduce your risk and exposure,
provide the expertise needed to evaluate
a deal, and to manage the property for
maximum return on investment.
Many investors are drawn to small
multifamily “Tweeners” (5-50 units) be-
cause it is a lower entry price. However,
the problems include:

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