Small Multi-Family

​My Fourth Property...

My Fourth Property...

What am I going to do? What’s my next investment?

Previously, we talked through one option I’m familiar with: Single Family Homes.
Now, let’s chat through another option I’m familiar with: Small Multi-Family (2-4 units).

Having recently closed on a duplex (2 units), my goal in acquiring that asset class was to scale my portfolio and grow. And grow it I did...tripling my portfolio from a whopping 1 unit to 3 units hahaha!

OK, that’s kind of a joke. But, it’s also true. Tripling your portfolio is an achievement, and if you view real estate as your path toward Financial Independence, you’ll most likely have to scale. Which is where the beauty of small multi-family comes in.

Keep reading for the PROS and CONS of investing in Small Multi-Family properties!

My Small Multi-Family Investment

PROS

• If you have experience in single family investing, this is a nice way to ease into bigger properties and learn the ropes of dealing with a multi-unit asset
• Economies of scale start to kick in. For example: having to replace the roof on a duplex will probably be around the same cost as a single family house.
• You have the option to "house hack," meaning you can live in one unit while your tenant(s) help pay down your mortgage.
• House hacking also allows more loan options and flexibility because the property would be considered your primary residence. For example: I've been required to put down 25% on my rental properties, but as a primary residence, you can find ways to put less than 4% down.
• Higher cash flow and Cash on Cash returns. You can generally purchase a duplex for less than two single family properties so there's less cash out of your pocket. Rents also stay pretty consistent.

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CONS

• Higher operating expenses than a single family home. Obviously with multiple units, you're bound to have higher repair expenses. So factor in bigger cash reserves...because there may be a day when you need to replace 2, 3, or 4 water heaters at once :(
• Generally a higher tenant turnover. I'm not sure there's concrete data behind this, but from talking with fellow investors, most of us agree, there's higher turnover in the multi-family world. I'm thinking maybe it's because there's less pride of ownership in the property?
• Slower appreciation. Single family properties appreciate faster than small multi-family and usually garner higher sales prices because you're often dealing with retail buyers. And their emotions. For the most part, someone buying a small multi-family property is a calculated investor. Someone who's running the numbers and is more apt to walk-away if the numbers don't work for them.
• Limited group of end buyers. As just mentioned above, someone buying a small multi-family property is typically buying it as an investment. That limits your buyer pool.

 
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There are plenty of PROS and CONS to evaluate when buying a small multi-family. I'm personally starting to really understand the impact of scaling up and having more units under one roof. So the economies of scale are a huge benefit. But those PROS always come with CONS.

​Key Takeaways

• If you want to scale your portfolio, small-multi family investing is a great option
• The ability to "house hack" and take advantage of the economies of scale are some of the biggest benefits of small-multi family investing.
• Always have more cash in the bank for future repairs, as your operating expenses will rise in the multi-family world
• Expect higher tenant turnover, slower appreciation, and a limited buyer pool if you try to sell.

​-Tyler

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