Important Considerations When Investing in Small Multi-Family Housing

What is Small Multi-Family Housing?

The boundaries of a residential property don’t have to contain one family. Nor do they have to contain one home.

 

As defined by Investopedia, a “Small Multi-Family Home” is a building with two to four dwellings. As opposed to an apartment complex that might serve the needs of those occupying five or more units. The terms “duplex,” “triplex,” and “quadruplex” may be more commonly used to distinguish between a larger apartment complex containing more than a few rentable homes and those that might be able to serve two, three, or even four families. And though the name “apartment complex” and, say, “quadruplex” might be used interchangeably, terms associated to the latter might also imply a structure that looks closer to a single family home instead of a facility that could hold a larger quantity of people.

 

“First, I qualify small multi-family as a building/complex with two to four units,” says Scott Abernathy, property manager and owner of Middle Tennessee’s Reliant Property Management. His business has managed more than $22 million in real estate assets. “I currently have about two dozen under management and own a couple myself. My first property was a triplex, purchased in 1989. Given that, I have over 25 years of experience managing/owning these types of properties. Over the years I have personally bought/built about a half dozen of them.”

 

What’s the Appeal of Small Multi-Family Housing?

Abernathy explains that there are several benefits to buying small multi-family properties. He tells GREEN that 1) the cash flow is usually better; and 2) the price per unit is usually lower. In addition, heating costs can be positively impacted. For example, if one unit is empty in the winter (assuming the other unit has heat on) the risk of freezing is lower. Finally, there is a bit more financial stability in that if one unit is empty, you usually have at least one other unit still producing income.

 

Chris Garrett, sales manager of the Rutherford County based Weichert Realtors – The Andrews Group

Outside of Abernathy’s survey of such a property’s positive characteristics, the ownership of a small multi-family property would allow a landlord to serve multiple people while having to monitor fewer locations. In addition to Abernathy,  Chris Garrett, sales manager of the Rutherford County based Weichert Realtors – The Andrews Group, chatted with GREEN about small multi-family properties. Garrett told GREEN that the perks of small multi-family housing really depend on the needs of the buyer.

 

“Well, you know, you have to look at it from two different angles,” he says. “One is the return on investment per structure, and then the flip aspect; the value of the sale down the road. Really… I see anything – a duplex, triplex, and quadruplex – you can go just larger. They are more of a ‘buy and hold’ strategy because if you go to sell a duplex, your most likely buyer is going to be another investor. Not mainly a single family home buyer. So your sales price is probably going to be lower in the amount of selling a duplex as it is a single-family home.“

 

Garrett also noted that for a small multi-family home, the owner can live in one home and rent out to others to offset any costs. Garrett spoke to the notion of multi-family homes reaching multiple families. “I think the key is that if your strategy is to buy, to rent, and to sell short-term – say within five years or things like that – I would stay more in a single-family… atmosphere. Because you can buy that structure, you can rent it out. When you go to resell it, your buyer pool is much greater. As far as return on investment, you know, you gotta look at it like doors. So, if I buy a house, and I have one door, then I’m getting rent from one family in that structure. But if I buy a quad-plex, I’ve got one structure, and I’ve got four doors. So, single-family “one door,” [if] they stop paying their rent, they tear up the house… well you’ve lost your entire money… or your entire income source on that house. But if you have a quad-plex, and one person stops paying their rent, you still have three people paying their rent. So, you’re diversifying your income… per structure. I think that if you’re gonna really think of it for long-term investing – duplex, triplex, quadplex, sixteen-door apartments – that’s gonna give me a more lucrative investment long-term as a hold strategy.” He later added “It’s a great alternative investment, because you look at the stock market – the volatility of the stock market – people start to see real estate as a good investment because now you have an asset sitting there. It’s not only giving you money as far as the rent, it’s also appreciating in value. So it’s become a good alternative for people to put their money [in]… plus it’s hard to live in a stock! (Laughs) So, you have that ability too, you have a structure that you could actually live in.”

 

Adding to the analysis of Abernathy and Garrett, Entreprener and Business Insider contributor Grant Cardone wrote a blog titled “An investor who owns 4,000 apartments explains why multi-family real estate is the best investment he’s made.” The blog opines that small multi-family homes are a choice investment because “75 million Baby Boomers are headed into retirement, many of today’s apartment complexes may be converted to retirement communities in the future, many millennials aren’t buying homes, and it’s getting more expensive to build new apartment units.” In the blog, Cardone later states that “Your initial challenge is getting a down payment. Once you do, it’s easier to get a loan on a multi-family unit than any other piece of real estate. Multi-family is the easiest way to get rich once you’re in the game. I can go online today and find a 49-unit property priced at $35,000 per unit with an 8% cap (the return on investment based on the income a property is projected to create) for $1,750,000.”

 

What’s “The Catch” When Looking Into Buying Small Multi-Family Housing?

Financial advice website Money Under 30 lists five points for consideration when one wants to buy a small multi-family home. The article for the website, titled “So, You Wanna Buy a Duplex? 5 Things to Know About Multi-family Homes” tells those pursuing such housing options that they need to be prepared to deal with limited location options. Also, the benefits are counter-balanced by problems associated with the benefits. In addition, financing such homes can be complicated and that there may be legal issues depending the specific circumstances of the property (“where the structure is located, for instance). Lastly, one should think about how the consequences may impact them if they choose to move.

 

For certain areas, small multi-family homes might not be a viable option for purchase. Using the Middle Tennessee area as an example, Garrett shared that some areas with hotter housing markets might not have as many small multi-family homes available for investors to purchase. At the time of his interview, he stated that he was only able to find 10 quadruplex homes in the Nashville area.

 

For Abernathy, there are several drawbacks to managing such a property, including: 1) a more intensive management; 2) the usually higher maintenance costs; 3) noise issues between tenants; 4) possible parking woes; and (in his experience) 5) a usually lower tenant quality (caused potentially by “improper screening of an applicant,” adding in another part of the chat that some residents occupy small multi-family homes because they have no other options available to them.) “The benefit to a tenant is typically price,” tells Abernathy. “Usually a duplex unit will be less expensive than a house or an apartment. The biggest difference you will find in managing small multi-family units and SFD’s [single family dwellings] are neighbor disputes. It’s hard for a landlord to stay out of it when they control all the units.”

 

When asked “could the multiple occupants in a small multi-family home increase the amount of wear-and-tear on the property,” Garrett couldn’t speak either way to what kind of damage could be done to the property. He did offer that such owners looking to rent small multi-family properties usually make the necessary modifications to the home to prevent such issues from being a long-term problem. Readers are advised that there may be certain circumstances where an increase in foot traffic (in a common area in the small multi-family housing, for instance) might “add up” to whatever potential damage is to be endured on the property.

 

Though not listed as a negative, Green Residential’s blog “A Beginners Guide to Investing in Duplexes” gives a list of mistakes to avoid that may be re-categorized as negatives. Those items include fiscal miscalculations pertaining to both rent and repair costs, as well as the “X Factor” of why the seller sold the property in the first place.

 

Considering a Small Multi-Family Home…

Online real estate sources like The Nest and businesses like Madden Real Estate place the small multi-family properties like duplexes, triplexes, and quadruplexes as “solid” investments for buyers (with some stating that such properties might be a great “starter” for the novice in real estate). If the option is available in the desired market and the person looking to buy doesn’t mind dealing with multiple tenants in one property, such an option could be a satisfying asset.

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