Key Advantages to Multifamily Investing

In post No. 1 I indicated some of the reasons why I personally invest in multifamily properties, namely because it presents a tremendous opportunity for creating wealth. One of the reasons for this is because generally speaking apartment buildings as an asset are considered stable and low-risk investments, especially if compared to stock market investments.

Other concrete advantages of multifamily investing include the following:

Efficient Use of Your Time:

Owing multifamily properties significantly enables you to achieve greater efficiency with your time. If you are like me you don’t have enough of 24 hours in a day to accomplish all you want and need to and you have to make the best possible use of your time. The beauty about owning apartment buildings is that you own many income-producing suites all under one roof, the management of which is also concentrated under one roof as opposed to being spread out between many smaller rental properties. Even better, all these suites were also acquired in one transaction. Accordingly, you have acquisition cost savings as well as time saving. You can easily see how your time can be used more efficiently while at the same time generating a greater income, especially if you took care up-front of putting in place sound management systems (I’ll have a post on what personal management systems I have in place).

In addition, large multifamily properties are less labor-intensive as they normally generate sufficient income to enable you to hire a professional property manager, which further frees up much of your time. Your job is to manage your property manager. The cost for the property manager is considered to be another operating expense along with utilities, property taxes, etc.. Accordingly, the cost of professional property management must be factored in and it is calculated as a % of effective gross income, usually in the range of 4% to 6% of the effective gross income (income after deducting vacancy loss, before deducting operating expenses and mortgage payments).

Consolidation of Operating Costs

The larger the multifamily property the better the economies of scale you can achieve. It’s a basic principle of economics that usually the larger the size of a plant (asset) or industry the average cost of producing it will be lower. This is one of the reasons why the very large and institutional landlords such as REITs (Real Estate Investment Trusts) ideally focus on purchasing apartment complexes of 100 plus units as much as possible. In the case of apartment buildings, this principle applies to operating expenses. Fixed costs are spread out over more units and therefore cost less on a per unit basis. To some extent, the same can also be said for some variable costs such as heating, for example, which do not increase proportionally to the numbers of units in the building. Tenants in upper suites in a multi-floor apartment building benefit from the heat coming from lower suites. In other words, economies of scale are greater as you increase the number of units in your building.

Your Personal Income Does Not Matter…

One good news is that for the purpose of qualifying for financing, the borrower’s personal income is not generally a factor contrary to smaller rental properties of 1 to 4 units. From the bank’s viewpoint, the property should be generating sufficient cash flow on its own without taking into account the borrower’s income. Your deal is analyzed purely on its commercial merits.

On conventional deals (non CMHC-insured) especially, the lower loan-to-value (LTV) further serves to reduce the lender’s risk because the property has a greater amount of equity in it and a corresponding better cash flow and as a result presents a lower risk to the bank in the event of default by the borrower. On CMHC-insured deals, if the annual debt-coverage ratio (DCR, which is the Net Operating Income (NOI) divided by the mortgage payments), for example, barely meets the minimum DCR 1.30 for a 5-year term, as an extra precaution CMHC might consider the fact that the borrower also earns a good income to justify the rationale for approving the loan. In other words, if for whatever reason the property’s income were to be reduced, CMHC has some assurance that the borrower has additional personal income to supplement potential cash flow shortfalls.

Vacancies Have a Lesser Impact on Income

Clearly, vacancies in a multifamily property have much lesser impact on your cash flow. For example, one vacancy in a 24-apartment building represents a vacancy rate of only 4% versus 100% in a condominium unit. Accordingly, apartment buildings enable you to better absorb fluctuations in the market vacancy rate.
Again, the above is not intended to be an exhaustive list of advantages to owning multifamily properties. However, you can easily see that the benefits are significant.

In my next blog post (# 4), I’ll give you some tips on how to get started in investing in multifamily properties. I definitely think you to need to plan well in advance as I did myself and I will tell you what in my opinion you should include in your planning.

Pierre-Paul

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