The Pros of Multi-Unit Dwellings As An Investment

Economies of scale is one of the big advantages of owning multi-family real estate. Time identifying a property, crunching the numbers and performing due diligence is leveraged with multiple units. Each renter generates a separate cash flow providing diversity in the income stream. In a similar fashion, repairs costs are leveraged by spreading costs over a larger asset base. While the cost of a new roof or other major repair is greater for an apartment building, it is less than the costs associated with replacing the roofs of multiple single-family homes.

Another advantage of multi-unit dwellings is the simplicity of dealing with multiple tenants at one location. Versus lots of tenants spread across multiple properties. Landlords also gain better negotiating power with property managers and other service providers when multiple units are at the same site. More efficiency means a higher return on investment.

More Income Equals A Better Investment

More reliable monthly income is another benefit of multi-unit dwellings. Instead of one rent payment there will be multiple rent payments coming in to offset monthly expenses. Risk is generally lower with multi-unit dwellings since odds are good that some apartments will be generating rent even if other units are vacant or under construction. It’s rare for a multi-unit building to ever be entirely empty.

More income per square foot is often possible with multi-unit buildings.  A single-family home in a desirable LA neighborhood may fetch rents of $3,000 a month or higher, but a multi-unit building at the same location could easily command rents of $2,000 or more per unit. In this scenario, a six-unit apartment building could generate north of $12,000 in monthly rent.

Investment Appreciation Is Higher With Multi-Family Real Estate

Appreciation potential is usually greater for multi-unit dwellings. Regardless of upgrades that have been made, the value of most single-family homes is closely tied to surrounding properties. Different methods are used to value multi-unit dwellings and building owners also have more options for maximizing the value of the property. For example, a landlord could increase the value of an apartment building by making upgrades that support higher rents or adding revenue generators such as on-site dry cleaning or day care.

The Cons of Multi-Family Real Estate As An Investment

Tenant turnover is one of the biggest hassles of owning a multi-unit building. Tenants leave for all kinds of reasons and even properties that are well-managed and maintained experience turnover. There is also risk from tenants who stop paying and must be evicted. Some risk can be mitigated by good tenant screening, but landlords must plan for some tenant turnover in the building budget.

Acquisition prices are often higher for multi-unit buildings and purchaser usually must come up with a larger down payment, sometimes as much as 25% of property value.  Lenders often demand more cash upfront from landlords who don’t plan to live at the property. Renovation and maintenance costs also run higher as well, requiring landlords to maintain significant cash reserves. On the other hand, it is sometimes easier to secure financing on multi-unit apartment building since lenders usually attach more weight to the property’s cash flows and are less interested in the borrower’s credit history.

Multi-Family Real Estate Investing Takes A Larger Investment

Larger investments carry greater risks. Delays in completing renovations or difficulties in securing tenants can result in massive losses for apartment landlords. Cash burn rates may also be higher due to more spending on debt servicing and maintenance. Experience in owning multi-unit buildings greatly helps mitigate these risks. Hence the popularity we are seeing from our clients who graduate up from single family home rental properties to multi-family.

Here at Coastal Capital we understand the challenges facing buy & hold real estate investors. Most of our clients are repeat because they value time and how fast we close on multi-family buildings so they can maximize their investment. To learn more about us please visit our Borrower Page.

Will the California real estate market continue to soar?

Throughout the Golden State every real estate market saw incredible price appreciation in 2020. The state’s bird, the California condor, needs the power of wind to soar and reach new heights. This past year the wind powering residential real estate has been record-low interest rates and the COVID pandemic. This combination created incredible demand for new housing and those seeking to work from home in more comfortable spaces.

If we remember back to our Economics 101 class with heightened demand, comes greater supply. Problem with housing is that you can’t just flip a switch and create more homes. Development takes time, so California’s housing supply remains consistent. More demand and same supply means more buyers bidding up prices for California residential real estate!

Mortgage rate forecast

Ninety-five percent of home buyers have to be able to afford the monthly payment to purchase their home. The remaining 5% are those lucky enough to pay for their real estate in all cash. So mortgage rates play a huge part on the demand-side of the real estate market.

The Mortgage Reports recently provided its forecast of residential mortgage rates for the first-quarter of 2021. Specifically the forecast calls for record low rates to drop even more in January & February. Then creeping up a bit in March (but still well below 3% for a 30-year fixed mortgage.) We expect that rates will hoover in this territory for the remainder of 2021.

Mortgage rates primary driver is the Federal Reserve with its monetary policies. The continuation of the Fed’s commitment to easy money will keep pushing assets prices higher. Recently the Federal Reserve commented that this strategy of “loose money” will continue for at least 2 years! It is transforming from inflation-fearing to recession-fearing.

Pandemic demand continuation?

The COVID pandemic has forever changed the work environment landscape. Many workers report enjoying all the benefits that come with WFH. No commuting, more time with family, connivence of doing the work on their terms. Even with the vaccine on the horizon, many expect a fundamental shift to continue in all real estate markets in the US.

Post-vaccine we expect to see many companies switching to a hybrid-WFH business model. Many businesses are reporting much higher employee productivity with the elimination of commutes. Plus, a remote worker does not need the footprint in an office allowing for much smaller work spaces. Downsizing office and work space means more savings right to the bottom line!

Employees who enjoy the WFH will gravitate to employers that allow for them to continue with flexible schedules. Talent that is in scarce supply will walk now that they see the possibilities. Slowly workers will return to office and working spaces but not on a full time basis.

Prediction for 2021 California real estate market

Overall the real estate party will continue to roll in 2021 for residential markets. Commercial office space we expect more stagnation as new demand will be slow. So existing business will continue to reduce foot print sizes. For investors in residential real estate and trust deeds we expect strong returns to continue with minimal risk.

Here at Coastal Capital Group we won’t be changing our conservative and fundamental approach to underwriting. We will keep deploying capital into solid deals meeting our proven fundamentals. If you are sitting in cash, it’s pretty clear that you want to get out of it to avoid inflation erosion.

With the Fed’s commitment to fighting the recession, inflation will increase. Not surprising if the US sees inflation at 4% or more. We strongly suggest getting out of cash and investing in assets or strong cashflow. Start earning returns now either in purchasing residential real estate or investing with us! To learn more about Coastal Capital please visit our Investor Page.