Is Amazon going to force commercial retail real estate down? We have been seeing a big decline in commercial real estate investor confidence in the retail space, which has led to an uptick in multi family investing? Why? Well, people always need a place to live, right? I won’t go further into detail on that macro-economic discussion, but I do want to quickly outline why I personally like multifamily. For clarity, I’m talking about anything 5 units or more, and primarily apartment complexes. It comes down to 3 factors.
- Vacancy In a single family home, vacancy means ZERO cash coming in. If you don’t have a tenant, you are in trouble. Because of that, you will likely end up compromising on the quality of tenant you sign with at some point. Bad tenants lead to the majority of “woes” most real estate detractors cite as to why they don’t like real estate. In multi-family, vacancy is a true, in practice, percentage, so there’s still money coming in! That’s safer and more stable.
- Forced Appreciation As I’ve discussed previously, the value of income producing property is primarilya function of one variable: Net Operating Income. In single family homes, value is largely based on comparables, meaning it is dependent on what others were willing to pay for a similar house. Why does this matter? When value is derived from NOI, you have some level of control. If you can add units, make repairs, cut expenses, or otherwise increase your NOI, you do 2 awesome things. First, you increase your cash flow, which everyone loves. Second, as a function of your increased NOI, you are increasing the VALUE of your property! You are more in control of the value of your property. While these value-add opportunities are few and far between in some markets today, the theory is still sound!
- Volume How much more effort do you have to put into buying a 16 unit apartment complex versus a SFH? I submit to you that the effort put forth by you and your team is similar, yet the latter has far more attractive numbers, risk profiles, and value add opportunities. Stop thinking small! Unless you can achieve volume in a single family buying strategy, I would prefer sticking with multi family.