After attending a real estate seminar in 2010, I quickly realized that investing in single family homes for rental income was not the way to go. This goes against a lot of things that most so-called real estate gurus were telling us in those late night infomercials.
There are two major reasons why real estate investors should stay away from investing in single family homes.
1) You Only Have One Tenant
Basically, if your tenant decides to leave or not renew the lease you are stuck paying the monthly mortgage until you find another tenant. Many single family home investors will contend this is the reason why tenants have to make a deposit. However, that deposit is only for one month. If you have not found another tenant after a month, then you will be responsible for paying your monthly mortgage.
2) Minimal or No Cash Flow
You will need to purchase a lot of single family homes to bring in a significant amount of cash flow. This means you will be responsible for the mortgages of several single family residences. Furthermore, it is very hard to find a single family home where your mortgage payments allow you to charge a reasonable amount of rent and make a decent profit. In addition to making mortgage payments, you will also be responsible for property taxes, home owner association fees, and repairs that may need to be done around the property. All of these expenses will eat into your profits and, in some cases, actually have you paying out of your pocket.
The Alternative To Investing In Single Family Homes For Rental Income
The alternative to investing in single family homes is investing in multi-family properties otherwise know as apartment buildings. Just the thought of investing in apartment buildings brings the fear of god into most people. But I learned that investing in apartment buildings makes a lot more business sense in terms of scale and profitability. Contrary to what you may think, it may be actually easier to acquire an apartment building versus a single family residence.
Here are the primary reasons that you should invest in multi-family properties or apartment buildings:
1) Multiple Tenants
In apartment buildings you have several people renting units. As a result, you can lose a couple of tenants and still be able to cover your monthly mortgage and expenses. While every apartment building investor strives to be at 100% occupancy, with multiple tenants there is no extreme pressure to get unoccupied units filled. Why? Because most apartment buildings are generating a consistent profit even at a 75% occupancy level.
2) Higher Cash Flows
Multifamily properties can easily bring in a significant amount of monthly cash flow. This is primarily because you have scale working in your favor.
Example: You bought an apartment building for $1 million that has 25 units. Your monthly mortgage excluding other expenses is about $7000. The average monthly rent that you collect on each unit is around $700 per month. If you had only 20 units occupied, which is at 80% occupancy, then your gross monthly rental would be $14000 per month. After your mortgage is paid your cash flow is $7000. If you were to add in up to $5000 in other expenses you left with a free monthly cash flow of $2000.
3) Easier To Get Financing
Believe or not, even with bad personal credit, it is easier to get financing for a $1 million apartment building than it is to get financing for a $75,000 single family home. Why? Because the bank is not looking at your personal income, they are more concerned with the income that the apartment building will generate from rent. In addition to that, the loan is secured by an income generating asset. In addition to getting bank financing there are many private investors looking to invest in apartment building deals.
Another nice benefit of owning apartment buildings is that while you are generating a monthly cash flow you are building equity increasing your personal overall net worth.
I am so glad that I was able to attend that real estate seminar in California because it really opened my eyes to the type of money that could be made investing in multifamily properties. Since then I have purchased several resources that have helped me learn how to invest in apartment buildings.