December 10, 2019
Purchasing Multifamily as a First Time Homeowner
In the U.S. economy, Homeownership is the most used wealth builder in terms of creating a higher net worth. Year 2015 estimated the average net worth of a homeowner came close to toping $200,000. For a renter, that number was barely above $5,000.
The Odds of Success
It’s often a debate, if one can consider their first house an investment property that builds their net worth, or a liability that takes away. Again, this primarily depends on the purchase price + debt service (if purchased using a mortgage) vs the total value of the home, other factors can play a role as well, pricing and debt are the top game changers I’ll use to make the equation, simply due to the equity that is formed based off the purchase price and what is owed to the bank.
Why it would make sense to purchase your first home 2-4 units (Residential) using the information above, from a wealth building viewpoint, is because of the number of people utilizing the same roof.
Being the owner of one unit while renting the others out, allows the owner to generate income, creating the option to pay down the mortgage faster or simply allowing the purchase of a second property repeating the process.
If the property owner becomes unable to make their mortgage payment due to job loss, illness, or whatever it may be, they would have payments coming in from the other units decreasing the chances of foreclosure.
Overcoming the Fear
From a rookie to becoming an experienced real estate investor, I can see the number one cause for most people choosing not to become landlords and not taking the entrepreneur path of real estate ownership: FEAR.
Fear – an unpleasant emotion caused by the belief that someone or something is dangerous, likely to cause pain, or a threat (Oxford Dictionary).
Having a Desire, with Courage, Knowledge and taking Action, makes fear less likely to limit one’s Beliefs and Growth. It allows the what seemed “impossible” to become “possible” and the possible to become an achievement.
It’s not a huge difference in the amount of time it takes to care for a duplex (2 units) vs a tri-plex or quad-plex (3 or 4 units) in the multifamily industry. Once the in and outs of the business is learned, tasks become easier to tackle based on each landowner’s approach and there are plenty of approaches.
Networking with Experienced Landlords makes this process a lot easier. Creative thinking is often used to turn a bad scenario into great investment opportunities.
Measuring the Cost
The cost per unit is what makes the numbers look better comparing purchasing a single family as a first home vs a two to four unit. Cash-on-cash returns typically are better. The acquisition costs per unit are lower as you purchase higher-capacity multifamily properties which help to secure financing.
Four homes under one roof by far works better than having four houses in four in different areas from a business owner’s standpoint. Depending on the distance between each property will determine how many maintenance teams will be needed to service the properties when problems occur.
One great maintenance guy or team can only travel so far and do so much in one day. Repair times are critical when tenants are paying you to supply the place, they will call home.
Financing
When financing a 2 – 4-unit apartment complex, financing can be much easier to obtain. FHA loans can be used to purchase these units allowing a borrower to receive favorable terms with less money down (3.5%) or even lower, if one meets the qualifications to receive a VA loan. This option is favorable for those who are first time home buyers. Trying to purchase a commercial property, not having a track record, often leads to rejection.
Making the Choice
Becoming a landlord is not for everyone, (not everyone in their current position that is). Becoming a landlord is no different from anything else in terms of taking action.
One must First decide to do it, Second overcome the fear to do it and Third jump into doing it as soon as possible, to learn from the mistakes that life offers each of us, who make the choice to try something different, while gaining knowledge doing so.
