I was recently in San Francisco for a speaking engagement. After I had returned to my home and business in Ohio, we started getting a lot of calls. These calls were from people based in California who have some pretty deep pockets—like about $300,000 to $400,000 to invest—but a lot of them have never actually invested in real estate. Their interest in calling us was that they wanted to buy multifamily.
But I advised them not to buy multifamily. I advised them to buy single-family homes, gain experience and then, after a certain amount of time—after they’ve paid their dues investing in single-family homes—they can progress into multifamily homes.
Now of course they weren’t happy with that and wanted to buy a multifamily property right off the bat.
But in my opinion, anyone who is looking to invest in real estate should start off small. And the best way to start off small is to invest in single-family homes.
Why? Because you need less money. The more money you use, the more risk you take. It’s common sense, right?
So if you’re looking at investing in multifamily, you’re going to be taking a larger risk because you’ll need more money to invest in those type properties. If you’re going to invest in single-family homes, you’re going to take on less risk because you need less money.
That would probably be the first thing I mention as a benefit of investing in single-family homes versus multifamily homes. It takes a lower entry price point, which means your risk is minimized.
The second thing I would say is the multifamily is a completely different animal than single-family.
A lot of people might think that it’s better to invest in a multifamily property because everything is under one roof, right? For instance, let’s say you’ve got 20 apartments under the same roof. You’ve got one basement, where you have all the furnaces and hot water heaters. And the thought is that if one unit is vacated, you’re still making cash flow out of the other ones.
Well, that’s all well and good, and I agree with that, generally. But multifamily is a completely different beast in regard to the calculations an investor has to make. Like when you crunch the numbers for a single-family home, the return on investment is much easier to calculate than for a multifamily property.
Let me give you an example. For single-family homes you have a single number for the rent. But when you’re buying a multifamily complex, you can have a combination of one-bedroom units and two- or three-bedroom units, for example, and the rents are different for each one. So the calculations are going to be a bit more difficult, for one thing.
When you’re buying a single-family home it’s pretty simple to consider property management fees, your annual taxes and your annual insurance. With multifamily, you’ve got those same considerations, and they are going to be much higher than they are in a single-family home. Also, depending on how big the multifamily complex is, you’re also going to have to think about having a full-time maintenance person on site and you may even need to get one or two full-time employees who will supervise getting all of your units tenanted. With a single-family home you can just do that yourself, right?
So it’s just a much larger-scale and a much riskier investment. You need more money and if things go south—I mean anything can go south—you lose your investment completely.
So why as a beginning investor would you even want to take on that risk?
Here’s my advice: Start out small. Get your feet wet by investing in single-family homes. Master as much as you possibly can before you consider investing in multifamily.
I’m the living proof of this. I’ve done more than 400 deals, and most of them have been single-family homes. Only a handful have been multifamily or commercial properties. And I’m still sticking to single-family homes because I haven’t mastered that fully yet, and I really want to own this. I want to have total mastery of single-family home investing, so that I can comfortably start doing multifamily.
And then it’s going to take a good bit of time and experience before I completely master multifamily so that I can potentially go into commercial. I see commercial as the last stop in real estate investing.
But before you can even think about that, you have to master the first step—which is single-family.
About the Author
Engelo Rumora, aka “The Real Estate Dingo,” is a successful property investor, motivational speaker and serial entrepreneur who quit school at the age of 14 and played professional soccer at 18. He also is a soon-to-be-published author and aspiring host of his own real estate house flipping show. To date—and against huge odds—Engelo has been involved in over 350 real estate deals worth $50 million in transactions along with successfully founding and running five businesses in Ohio. The most prominent of those is List’n Sell Realty, a Toledo-based discount real estate brokerage offering a “first of its kind” referral program in the nation. Visit www.listnsellrealty.com for more information.