One Door or Many Doors: Investing in Houses vs Apartments
With an article title similar to a famous Hamlet quote, I knew I had to bring the facts clear and concise (unlike much of the historic work by Mr. Shakespeare). With either choice, investing in real estate has many benefits. Let’s discuss the benefits of each, finishing up with a comparison of the two real estate investment options, speaking specifically to high net worth individuals looking to determine which option is right for them.
Multifamily, real estate investments (also known as apartment complexes) can be a great opportunity for high net worth individuals for several reasons:
· Strong potential for stable cash flow: Multifamily properties can provide a stable and predictable stream of rental income. This can be especially attractive for high net worth individuals who are looking to diversify their investment portfolio with assets that generate reliable cash flow.
· Tax benefits: Real estate investments offer a variety of tax benefits, including basic deductions like mortgage interest and property taxes, but also the most under-utilized deduction: depreciation. These benefits can help to reduce the overall tax liability of high net worth individuals. The depreciation of multifamily properties can equal millions of dollars in tax write offs.
· Potential for appreciation: Over time, multifamily real estate investments have historically appreciated in value, providing investors with potential long-term capital gains. High net worth individuals may be able to take advantage of this appreciation potential by holding onto their properties for the long term.
· Inflation hedge: Real estate is often considered an inflation hedge, as rents and property values tend to increase over time as the general cost of living rises. This can help to protect the purchasing power of high net worth individuals' investment portfolios.
· Diversification: Multifamily real estate investments can provide diversification benefits to high net worth individuals' portfolios. Real estate investments have a low correlation with other asset classes, such as stocks and bonds, which can help to reduce overall portfolio risk.
Overall, multifamily real estate investments can be an attractive option for high net worth individuals who are looking for a stable source of income, tax benefits, potential for appreciation, inflation hedge, and diversification benefits.
Single family real estate investments can also be a good option for high net worth individuals for several reasons:
· Lower entry barriers: Single family properties typically have a lower price point, making them more accessible for individual investors. Most people have bought a house before so they are comfortable with buying a single family house as their first real estate investment.
· High demand: There is typically a high demand for single family homes, as most of the population has a desire to attain the American dream of home ownership. This can result in high appreciation rates and up-swings in value. (The downside is that the high demand with non-investors can drive prices too high to make a single family house a wise investment).
· Appreciation potential: Single family homes in desirable locations with good schools, amenities, and infrastructure have the potential to appreciate in value over time. This can provide high net worth individuals with long-term capital gains.
· Flexibility: Single family homes offer greater flexibility for high net worth individuals to use the property as a primary residence or as a vacation home. This can provide a personal benefit in addition to the potential financial benefit of the investment. (The downside is that you have to be very organized and detailed with your taxes to ensure personal uses don’t offset the investment benefits).
Single family real estate investments can be a good option for people who are looking for a lower entry point, high demand, appreciation potential, and flexibility to use the property for personal use.
Most people already know the benefits of real estate investing compared to other asset classes, but how do you decide which property type is best for you?
Active single family investing vs. Passive multifamily (apartment) investing.
There isn’t a right or wrong answer overall, but here are the best questions to ask yourself to make the right decision:
How much capital do I have to deploy?
A basic investment strategy that we have used in our personal portfolio is to always invest in the largest investment that we have the ability to purchase.
Percentage returns can be the same, but 20% return on $15 million will be a much larger dollar amount than 20% on $350k. The best part is that you can typically acquire the $15 million property with the same amount of your own capital by partnering other investors.
How much time do I have to manage my investments?
Single family properties do not usually provide enough gross rental income to afford a property manager and still be profitable.
Multifamily properties on the other hand can provide $100s of thousands of dollars in gross rental income each month so there is plenty of money coming in to hire professionals to manage the maintenance, marketing, and finances.
If you have 20 extra hours each week to dedicate to investing, single family may work for you.
If you want to use your free time for other things or you don’t have 20 extra hours, multifamily is going to produce the best results both in finances and your stress level.
How much cash do I have for repairs and periods of vacancy?
Every property will have times when the property is “down” meaning there is not a tenant paying rent. The problem is that the bills don’t stop for that month. You will need to have funds left on the side to cover monthly expenses such as mortgage payments, utilities, property taxes, and insurance during the times a property doesn’t have a tenant.
Just like your home, rental properties of all sizes have repairs and maintenance.
You need to have the cash put aside to cover an $9,000 air conditioner replacement when it goes out in the middle of July?
How much experience do I have with real estate investing?
Like every profession, there is a “green” period when you are learning the ropes. If you do not have previous experience, the green period can only be overcome in 1 of 2 ways: with money or with time.
If you do not have experience, the learning stage with your first few investments will either take more of your time or more of your money to achieve the same results as an experienced investor.
General costs will also be more expensive if you lack experience. Most lenders charge premiums to inexperienced investors because they know that risk decreases as experience increases.
Many multifamily lenders will not even approve a loan for someone who does not have previous multifamily experience.
Does diverting time and attention from my chosen profession make financial sense?
Many high income earners are making 100s of dollars per hour of work. They are paid a lot of money because they have spent the years developing their expertise.
Real estate is the same. It takes years of real-world experience to gain a level of expertise.
Like most professions, the actual dollar per hour earned in the early years is minimal.
The expert will always make more than the intern.
If you make $300 per hour on average, you need to decide if it makes sense to do your own personal internship in real estate, which may only pay $20 per hour of work for the first few years.
Or does it make more sense to focus on your specialty that pays high dollars per hour, and put your money to work in real estate with a team that is already an expert in that field.
For example: There are doctors who are in their residency, where they learn the basics of multiple medical specialties.
Then, there are attending physicians who are working within their chosen specialty. Attending physicians are no longer learning the basics, they are focused within a specialty. Because of their focus, they are paid more per hour than a resident.
When it comes to investing, you need to decide if it makes sense to stay focused on your profession, or if it makes more sense to go back to being a “resident” in learning the specialty of real estate investing.
Back to single family versus multifamily investing.
Historical data shows that multifamily strategies provide high net worth individuals with higher returns while doing less work. When deployed correctly, here are the advantages that multifamily investing has over single family:
1. Economies of scale: Multifamily properties have more units than single family homes, which means that the operating costs can be spread out over a larger number of units. This can result in lower costs per unit and higher net rental income for investors.
It also means when there is 1 vacancy, the expenses for that month are paid by the other tenants, rather than coming out of your pocket, which happens with a single family house.
2. Diversification: Investing in multifamily real estate allows you to diversify your portfolio across multiple units and tenants.
If another COVID scenario hits us, you do not want the one house with a waitress living in it, because she will be out of work tomorrow.
But, if you have a multifamily property, there will be tenants from all different professions. Typically, when one profession is in low demand, others are in high demand.
This tenant diversification offsets risk during unexpected economic periods.
3. Professional property management: Multifamily properties often require professional property management to handle maintenance, repairs, tenant screening, and rent collection. This can be especially beneficial for high net worth individuals who may not have the time or expertise to manage properties on their own.
4. Scalability: Investing in multifamily properties (apartments) allows high net worth individuals to scale their portfolio more quickly than investing in single family homes. To acquire $10 million in properties would take a large number of single family houses. To acquire $10 million in multifamily could be just 1 property.
There is a financial term known as the “velocity of money.” The quicker money can compound, the quicker it will grow.
The speed and efficiency of putting capital to work is unmatched in multifamily versus single family. The focus on “velocity of money” can result in a higher net worth in a shorter amount of time.
Overall, investing in real estate should be part of the investing gameplan for high income earners. It is one of the few strategies that offer amazing tax benefits.
The question becomes what makes more sense for your personal situation? Are you committed to becoming an expert at single family house investing or do you get to your financial goals more quickly with passive investments in large multifamily properties?
Our team had years of experience in single family rentals before we made the transition to multifamily.
You can schedule a call with our team here.
*This article is my opinion. It is not financial advice, nor is it an offer to sell a security. Anyone interested in investing must first schedule a call with our team and review our private placement memorandums before investing. All investors with Grand Vision Capital Group must be accredited investors. If you are interested in investing, you can schedule a call with our team here.
