Don't miss the opportunity to find out which one is best for your style of investing. Join us for the conclusion to Single Family vs Multifamily!
When we talk about single family, we're talking about anything in the residential space, typically anything under five units, and multifamily refers to over 100 units or more. This week we're wrapping up our 4 part series on single family vs multi family and diving into: the benefits of single and multifamily, how these asset classes are valued and how quickly you can scale up your portfolio.
KEY TAKEAWAYS
1. Commercial property is based on NOI (Net Operating Income) which is net operating income minus expenses. You can increase the value of the property by decreasing expenses or increasing the income of the property.
2. If you decrease the expenses of a commercial property by $1 at a capitalization rate of 5% then the value of that property goes up by $20 by every $1 earnt or saved.
3. Capitalization Rate - The annual rate of return on a commercial property bought with 100% cash. Example: A 5 cap equals a 5% return.
4. You must focus on due diligence. It can be harder to carry out proper due diligence on a single family property and just buy a commercial block.
5. With single family you can renovate a property and sell it to a homeowner who will pay the highest price, plus you can manage the property to your liking.
6. If you're looking for control, then go the single family route. If you want to be a passive investor, then go the multi family route.
LINKS
Learn more about investing with Steven at
https://theinvestormindset.com/invest
Title: Single Family vs Multifamily Part 4: Speed to Scale & Ability to Increase Value
Host: Steven Pesavento
Duration: 15:37
(00:01) Narrator:
I've got some exciting news. Our operating partners on the commercial multifamily space have agreed to invite new investors into some of our future deals. We are proud to bring these institutional style opportunities to investors within our community. In order to have access to these investments, you have to sign up at theinvestormindset.com/invest. And we have thousands of people who listen to the podcast and we typically only allow 50 people to invest in each deal. So, make sure you head over there right now, because once we send out the email announcing our next deal, it'll likely be sold out and oversubscribed. So, get started at theinvestormindset.com/invest and I look forward to seeing you on the inside.
(00:47) Steve:
This is the investor mindset podcast and I'm Steven Pesavento for as long as I can remember, I've been obsessed with understanding how we can think better, how we can be better and how we can do better. And each episode, we explore lessons on motivation and mindset for the most successful real estate investors and entrepreneurs, in the nation.
Welcome back to this week's mindset minutes episode on the investor mindset and I'm Steven Pesavento. And each week I share mindset tips and investing strategies that can help you grow your business and really take your life to the next level. And this week we're continuing and wrapping up our series on single family versus multifamily investing and understanding which one's best for you. Today we're going to be talking about how each of these asset classes are valued and some of the pros and cons to that, and how quickly you can scale up the size of your portfolio. So, this week we're focusing on wrapping up our four-part series, comparing single family versus multifamily and understanding which one is best for you. And today we're going to be wrapping up on understanding how each of these asset classes are valued. What are the pros and cons to each of those and how quickly you can scale up your portfolio in each, and what are some of the benefits of that?
Join us each week, as we share more tips and strategies that are going to help you reach true financial freedom through real estate, by hitting that subscribe button and dropping us a review, if you love what we're doing. So again, setting the stage here. When I talk about single family, I'm really referring to anything on the residential space – anything below five units. When I'm talking about multifamily, I'm referring specifically to anything that's a hundred units or more. And so, I'm leaving out everything in that middle space for the sake of comparison, so we can really contrast the differences and the benefits of each of these. And as you guys know, remember, I've been investing in, in single family and done over 200 deals, flipped or wholesale, you know, over 200 properties. And I have owned multiple rental properties and currently still own some, currently in the process of selling some. As you guys know, I've made a full shift to commercial and specifically focused on multifamily. I'm coming at this from a perspective of, I've been in this space, I've taken advantage of some of the amazing pros in single family and I see some amazing advantages in multifamily. So at the end of the day, they're both great. And we're going to be outlining some of the final points so that you can decide which one is best for you and your style of investing.
So, when we talk about value, when you talk about the way that these properties are valued, there's something that's very, very different between commercial and residential type properties. When we think about single family, we all know how those properties are valued, like how somebody comes up with what the price of that property is going to be. And the way they do that is they go in and they look at the comparable properties, the past properties that have sold in the area and what those past properties have sold for. You know, where obviously you've got to make a light kind comparison. So, if property A is an exact match to property B and it's sold for a hundred thousand, then most likely we're going to expect a homeowner to buy this next property for a hundred thousand. Now they might buy it for a little bit more, there might be some more emotion involved there, but it's a low likelihood that we're going to be able to push that property much beyond what the neighbourhood or the area or the comparables of that specific property are able to allow us to push that value to. So we're really limited, but we are able to, when we purchased that property, know exactly what we're going to expect from it.
And so, on the residential side, there's not really a lot being taken into account for what the actual income value of the property is. You know, we're not really considering, we're looking at residential, how much money can I make on this, or how much investment return can I make? That's not really something that's being considered, but on the commercial side, that's actually almost the only thing that's being considered. So, the way commercial property is valued is that we're basing that on what's on the income minus expenses, also known as NOI, Net Operating Income. So, the NOI is essentially income minus expenses and because it's based upon that, we're able to increase the value by decreasing expenses or increasing the income of the property. So, if I'm able to raise rents and increase rents, I'm able to increase the value of the property. If I'm able to find savings and decrease the expenses, I'm able to increase the value and to put it that in comparison, it's dramatic, how big of a difference it makes. So, for example, if I decrease the expenses by $1 at a cap rate of 5%, the value of that property goes up by $20 for every dollar that I save, or new dollar earned. I mean, isn't that amazing? Isn't it incredible to think? I didn't say that wrong. For every dollar that I save, I create $20 of new value. And when I say cap rate, what that really means is capitalization rate. It's a term that is defined as, if I buy a property with a hundred percent cash, at the end of the year, what is going to be my return at a five cap? It's going to be a 5% return. Now we don't really buy property with a hundred percent cash, we always leverage and one of the big benefits of real estate is that we're able to smartly use leverage because we're able to control the asset. So, our returns are typically much higher than that 5%. But it's a number that we use to evenly compare different properties in different regions, in different markets and in different understandings. But I'll tell you that again, $1 equals $20 at a five cap. So, there's a huge difference. And of course, being able to raise rents, understanding the area of where that property is, it's going to make a difference. If all the other properties around it are renting for a thousand dollars, what's the likelihood that I'm going to be able to rent mine for 1700, but maybe if I can make my property that much better, I might be able to rent it for 1,050, 1,100. If I'm able to push up rent, which you only are going to plan to do this. If, if the numbers show that you can, if I were to push up rent, then that's going to make a big dramatic value add when we're talking about saving or adding a hundred dollars a month over 12 months, over a hundred plus properties, right? That ends up being quite a bit of money. So that is one of the differences between single family and commercial on the way that it's valued.
I think that there's some clear benefits to both single-family. You know that, okay, well, this is really what the property is going to be worth and what it could be valued by and I know that, most likely, I'm going to sell it to a homeowner. So, if I'm an investor and I'm able to buy in an area that maybe isn't a gray area for homeowners now but could be a great area for homeowners in the future. I might see some big returns in the long run when that property appreciates in value and ends up selling in an area that, you know, now a homeowner wants to buy, but it's not tied to the investment. Yeah. Self, which is something that I don't particularly love because I'm buying it as an investment, and I'm probably going to want to sell it as an investment, but that next person is really going to be looking at it more as a residential home. And so I think the value is pretty clear on the commercial front, on how those pieces are put together.
The second piece I want to talk about today is the efficiency and the speed needed to scale your portfolio. So, what is more efficient than buying multiple units at once? There's not a lot of things, right? So, if I'm going to go buy a hundred single family homes, it's going to take me quite a long time to work through the process of finding all hundred of those homes, analysing each of them individually and independently, making the offers on each of those properties. And of course doing the due diligence. And I have to underline that due diligence is one of the most important parts, right? So if we miss anything along the way, that is really important during due diligence that we could find, it could lead us to not having any profit in the deal.
And I'll tell you a story. I bought a property out in Cary, North Carolina, just outside of Raleigh. And this property is a phenomenal, phenomenal house. We are excited about renovating it. The numbers looked good and it looked like we were going to make somewhere upwards of about 50,000 in profit. That was going to end up coming at the end of this, this property. Well, we proceeded forth. We bought the property, but one thing we didn't know because we were coming from out of state and we had, even though we'd been investing in the area for a little while, we weren't aware of these underground oil storage tanks that were pretty common out in the Southeast. Now in California, these are not common in Minnesota, these are not common. These are not things that I have dealt with quite often in other investments, but it's something that is common there and we didn't know it. And we had bought multiple properties and had never had a problem, but this property had one of those, those oil storage tanks and it had oil in it and it had leaked. And so when we had found out about this, you know, it ended up costing us $15,000 to have that removed and have the soil remediated and have it all signed off. And the crazy thing about it was that, even after spending all that money and doing the remediation, we weren't able to get the sign off, that was necessary, to say without a doubt that there's nothing there. So essentially the EPA or whoever's responsible for managing that, couldn’t give us a sign off. So, we weren't able to tear down the house and build a new house there. We ended up selling the property. We ended up getting out in an okay position where we didn't make the kind of profit we were hoping for, but we also had spent months focusing on this property because of a minor due diligence thing that we had forgotten about. Now, obviously this is a much bigger issue if there were a hundred of those problems across a property on a multifamily front. So, it's super important that we really focus on due diligence. But one of the challenges with single-family is that we're looking at a hundred different houses. They all are unique in their own way.
It is often more time consuming to go through this process and harder than it is to go find one, 100 unit building and purchase that. So, from a multifamily perspective, there's a couple of benefits. I see the benefit of speed to raising and growing your portfolio to the size, be able to hit kind of that size to get the kind of returns that you really want and to be able to have some of those economies of scale. And then the other thing that I think is a real advantage of multifamily is the way that it's valued. On the single family front, I think there's a huge advantage to knowing that you could buy a property as an investment and then sell it to a homeowner who's likely going to pay the absolute most amount of money. I think that's a huge benefit. And I think the other benefit to single family, we talk about speed to scaling the portfolio is that if your focused on direct ownership and you need to be in control and you're not comfortable having an expert operator managing the property to end up you, those great returns and you need to be in control, then single family is the best option. Even if you have to slow down the speed of scaling your portfolio, you're the one who's in control. You're the one who's doing all the work and you're the one focused on all those little pieces that have to come together. And if you're detail oriented and you love being in control, then that's definitely the best option.
So, let's continue this conversation in the Facebook group over the investor mindset.com/group, and make sure that you can drop us a comment there. If you guys love what you're listening to, I encourage you to hit that subscribe button. And I just want to thank you guys. Thank you for being here, thank you for supporting and thank you for watching and listening to this discussion on single family versus multifamily. I think wrapping this all up in one big bow for everybody to think about is it's the mindset of understanding what your real goals are to hit financial freedom.
Are you the type of person who needs to be in control? Are you the type of person who wants to build that direct experience, managing the individual properties yourself? And do you have the time, effort and energy to focus on going this direction down the single-family path in order to go and buy those units? If you do, I think you know what direction you should go. If you, I want to take advantage of the economies of scale. If you want to take advantage of the diversification across both each individual, lease the deals themselves, the locations and the operators putting those together. If you're playing a passive role and you're the kind of person who's okay, giving up control to work with an expert, who's going to be able to put together a phenomenal deal for you, and you don't mind being invested in something from a passive perspective. You maybe don't have, I have the time or don't have the effort. Don't have the interest of becoming an absolute expert, every single little piece of managing that property yourself. Then I think going the multifamily route is probably the best option for you. And if you're interested in being an operator and taking advantage of some of the benefits on the multifamily front, then obviously, you know, going down that path of learning to be an expert, taking the extra time, the years of experience is going to take for you to get to that point where investors can really trust you with their money. Then you can see that in the long run, the payoff is really, really valuable on that front as well. So if you're looking for control, go the single family route, if you're looking for that quick start and want to be kind of in the driver's seat for every little piece and make every little decision, then I think that's the direction you should go.
If you want to take advantage of some of the upsides of multifamily, you've got two paths active or on the passive front. So, thank you guys so much for joining me for this series. If you like the series, please comment down below or comment in the Facebook group to let us know so that we can continue to put together more great content like this for you guys, absolutely being able to serve you every single day. And I want to leave you like, I always leave you remembering to live a life with inspiring others and you can do so today by taking action towards reaching your true financial freedom and getting yourself set up so that you can start living the life you're living. Thanks guys.
(15:10) Narrator:
Thank you for listening to the investor mindset podcast. If you like, what you heard, make sure to rate, review, subscribe, and share with a friend. Head over to theinvestormindset.com to join the insider club, where we share tools and strategies from the top investors and entrepreneurs and how to take it to the next level.