Today I wanted to write about the investing side of real estate. If your interested in investing in real estate but you don’t know where to start you should read my article “How to START Investing in Real Estate“.
I own both single family and multi-unit properties. They both have benefits and downsides. Today I’m going to try to focus on the benefits.
If you enjoy this article and find it helpful I encourage you to check out my book for sale “Anyone Can Invest In Real Estate”. It is a complete real estate invest guide.
Benefits to Owning Single Family Properties
When it comes to renting single family homes, one of the benefits is that all the utilities are in the tenant’s name and they pay for them. Its one less thing for you, the owner, to have to deal with. It’s also one less expense to take away from your monthly rental profit.
Some multifamily properties have the utilities split but, in my area, Northeastern Ohio, most multifamily properties have one or more utilities that are not separated, and the owner must pay this bill. Yes, you can charge more rent to try to make up for it, but you are at the mercy of the tenant for their usage of that utility. Personally, I don’t like to buy any property that leaves me paying the bills for the tenants.
Less Time Involved
Now this really depends on the tenant you have and the condition of the property. In general, most single-family homes bring you a steady stream of income monthly and all you have to do is take the check to the bank. I always write the lease agreement up so that the tenant is responsible for lawn maintenance and snow removal, this way I don’t have to waste an evening mowing the grass for my rental property.
You will still want to do a drive by of your properties every month or so. I even schedule a quarterly walk-through inspection of my rentals just to make sure everything is in good working condition.
I find that most of my single-family homes have a lower vacancy rate than multi family. If your property is in good condition, a decent sized home and your rent is set correctly then your tenants will want to stay for a long time.
Multifamily properties usually have smaller room sizes, tenants must share the outdoor spaces and their neighbors are just a little too close. They are either just on the other side of the wall in a side by side or right upstairs in an up and down unit. These reasons tend to cause tenants to look for a better situation and you end up with a higher vacancy rate.
Lease Option Possibilities
Now I don’t want to go into too much details on what a lease option is, maybe I can write that article at a later date. So, a brief description is… A lease for a specific term limit with the option for the tenant to purchase the property written into the lease.
There are many benefits to the tenant to do this, one would be they can allocate part of their rent payment toward the principal balance during the lease term.
I don’t want to spend too much time on the tenants benefits though, I want to focus on the benefits for the owner.
The biggest benefit is the extra cash flow. On a lease option the tenant pays fee upfront to have the right to purchase the property. This comes off the purchase price if/when the tenant buys the property but if the tenant does not buy the property then the money is forfeited to the owner. If the tenant wants they can pay down their purchase price with additional monthly payments.
So, you have a single family home that rents for $600 per month. That’s $14,400 gross income for 2 years. Take that same property and do a lease option with it… the number get better. Instead of $600 per month you could get a tenant to pay $600 plus $200 extra per month towards the purchase price and they pay $4,000 upfront for the option. Now we have $23,200 in gross income. Much better right?
You have to make sure the purchase price you agree on will work for you if the tenant follows through with the purchase which happens only about half the time.
Benefits of Owning Multifamily Properties
Higher Rent per property
Let’s say we have a large 4 bedroom single family home that was converted into a duplex. As a single family home, it would bring in $1,000 per month, hypothetically. Now that its converted into a duplex it has two 2 bedroom apartments that bring in $600 each, that’s $1,200 per month. That would be $2,400 more in gross income per year.
Less Time and Money Involved in Purchasing
Every home you purchase involves closing costs. If you purchase cash your closing costs may only be $1,000-$2,000 per purchase but if you are using some type of financing, you will then have lender fees to pay which could bring your closing costs up to $4,000-$5,000 per purchase. Let’s say we want 10 rental units, if we bought all single family homes with cash it would cost us up to $20,000 in closing costs. If we bought all duplexes with cash it would cost us up to $10,000. You can save money by buying multifamily properties.
Guaranteed or Forced Appreciation
A single family homes value will always be dependent on the current market, so if the market is up the value is up, if the market is down the value goes down. Multifamily properties value is calculated differently. The value is determined by the income it brings in. Unlike the market, rent always increases. This means your value on a multifamily will always be slowly increasing.
There are other factors involved in calculating value but to simplify we are assuming that general maintenance has been done to keep the property in good condition.
Lower Financial Risk
Every investment has some risk involved. Any vacancy in a single family home reduces the income to $0 and leaves you paying the bills. With a multifamily property there is less chance of bringing in $0 per month. On a duplex, if one unit is empty then your income reduces to half, but that half should be enough to carry your expenses on the property or at least close to it.
I really enjoyed writing this article. The investing part of real estate has been an interest of mine for a long time. I’m glad that I could share the experiences and information I learned along the way with you.
I would be more than happy to answer any questions you might have about investing in real estate, write a comment or email me with any questions you might have.
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