A quick primer: Single-family rentals (SFR) are a single house with one tenant and one lease. Multifamily properties are apartments, with many tenants and many leases. I personally have invested in both and see pros and cons of each that I’ll be discussing over the coming weeks.
Last week we talked about the time it takes to buy a property, but what kind of costs are associated with a purchase? (This article will not address the costs associated with ‘owning and maintaining’ a building, that will be a later post.). You’ll find it encouraging that regardless of which property type you buy, there are really only 2 items you will pay out of pocket: Down Payment and Closing Costs.
For this comparison, let’s assume we’re going to buy either 5 Single Family Rentals or one 10-unit apartment building.
For easy numbers, we’ll say that the 5 houses each cost $100,000, and that the 10 unit building costs $500,000. So the total value will be equal.
This is simply the amount that the lender wants to see you invest into the deal for them to feel safe lending you the rest. This is your money and is invested into the property. You would get it back if you sold the property at some point.
For the 5 SFRs, you will generally put down 20% on each. The bank will lend the other 80% of the purchase price.
20% of $100,000 = $20,000
$20,000 x 5 houses = $100,000 total down payment.
For the 10-unit apartment building, you will generally put down 25-30%. The bank will lend the other 70-75%.
30% of $500,000 = $150,000 total down payment.
If you don’t have a large chunk of money to use as a down payment, then perhaps Single Family is a good option for you to start with. But remember, whichever property type you buy, this is your money that is invested in the property and will come back to you if you sell the property.
This is a broad term that can include all inspections, document filing fees, appraisal fees, etc. These are fees – money you will not recoup upon sale.
For the 5 houses, you will pay closing costs on each property of approx $4,500.
$4,500 x 5 = $20,500 total closing costs.
For the 10-unit apartment building, you will pay closing costs of approx 2% depending on your lender.
2% x $500,000 = $10,000 total closing costs.
This is an area I see the huge benefit of multifamily properties. You get more bang for your buck since you are only paying 1 set of closing costs, instead of 5. Remember, these are fees, money you will not get back when you sell the property (unlike the down payment, which will come back to you).
And that’s it. These are generally the only costs associated with buying a property.
As you can see, combining the 2 costs, you will need less money upfront to purchase a Single Family Rental. Now, there are huge benefits to owning and maintaining a large multifamily property, but we’ll get into that next week.
If you are interested in investing in large multifamily properties but don’t have the capital needed for the down payment and closing costs, consider investing in an apartment syndication. As a passive investor, you don’t have to cover allthese costs since they’re split amongst the investors. As an added benefit, all these calculations, as well as all negotiations with the lenders, are handled for you. You get to ride on the coattails of experienced investors who have preexisting relationships with the lenders and get great lending terms that fit that property and the plan in place. But I always think it’s good to know what’s going on in the background as much as possible.
OK! You’ve bought a property, but now you have to run it like a well-oiled machine! We’ll dive into that in the next article.
Next week…Part 3: OWNING A PROPERTY