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.
We’ve talked about the time it takes to buy a property, as well as the costsinvolved. But what about owning and running your property? Let me introduce you to one of my favorite terms, “Economies of Scale.” Defined as: a proportionate saving in costs gained by an increased level of production. As in, the more units you have under one roof, the more cost savings you achieve.
Tenants and Turnover
With a single family rental, you have 1 tenant at a time. The minute they leave, your property is 100% vacant, costing you 100% of the mortgage while the house sits vacant.
With a 100 unit multifamily property, you have 100 tenants. But the minute 1 tenant leaves, your property is only 1% vacant. You can still easily pay the mortgage with the other 99 tenants’ rents that month.
Management and Maintenance
With a single family rental, professional property management will generally cost you 8-12% of monthly rents collected.
With a larger multifamily property, management can be as low as 4-6% of monthly rents collected.
With a single family rental, every maintenance request will generally cost you a bit more, since management will have to send someone out to the property, who checks out what the issue is, then they head over to home depot to get the specific supplies, then back to the house to fix the issue. This costs more time and more individualized/full priced expenses.
With a multifamily property, this all gets streamlined, as the property now has 100 units that are all exactly the same. When there’s a maintenance issue, management radios the maintenance person, who walks over to the unit to assess the situation, walks back to the supply closet to pick the piece that has been purchased in bulk at a discount, then fixes the issue quickly, and for less money than a single family house.
This continues in basically every aspect…
Say you need a new roof. With a single family rental, you pay full price for 1 roof, covering 1 door.
With a multifamily property, 1 roof covers many doors, not just 1.
Landscaping? A single family rental has 1 lawn for 1 door, but that same 1 lawn can cover an entire multifamily property.
Need to repave the driveway? 1 driveway for 1 house, vs 1 driveway for 100 tenants entering the property.
Need to paint the exterior of the building? Of course, a multifamily property is a larger job, but again, you get significantly more bang for your buck as the painter paints 1 exterior wall that covers many units of that building vs just the 1 unit of a single family rental
I think you get the point. Economies of scale work heavily in your favor as you invest in larger multifamily properties.
When you invest passively in large multifamily deals, you don’t have to worry much about your tenants, turnover or any maintenance issues, but you do get to enjoy the benefits of being invested in a large property that is running more efficiently due to economies of scale, which ultimately puts more stable returns into your pocket.
Next week…Part 4: SELLING YOUR PROPERTY – How properties are valued.