5 Common Misconceptions About Multifamily Real Estate Investing

Just getting started?

Then you should know the common misconceptions in multi-family real estate investing. These are the things I wish I knew about when I first started investing in real estate many years ago.

In this article, I will cover the five common misconceptions about multi-family investing.

1. You have to be a big business.

Sure, there are many life insurance companies, large REITs or REITs that acquire a large amount of multi-family real estate. And there's a good reason for that. Because of the stability, strong cash flow, and the upside with forced appreciation.

Life insurance companies love multi-family because life insurance companies need to earn a sizable return on the premiums they are collecting. When they pay out an insurance claim, they don't want to be stripping their bank account. So the strong cash flow from their investments is what pays that out. So that's why they acquire multi-family real estate.

But you don't have to be a big business to invest in apartment buildings. There is a wide range of people who invest in multi-family. You have some smaller operators who own a couple multi-family properties. Maybe they own a handful of 15-20 unit properties, mom-and-pop type of operators. Then you have mid-market type of companies who maybe own 3,000 units or so. And then you have some of the larger companies. I've had people on my podcast, Real Wealth Through Real Estate, and they own over a billion dollars of multi-family real estate.

So there's a wide diversity in the type of ownership. But the common misconception is you have to be a big business to get involved in apartments. That's not the case at all. I know and have spoken with many people — I’m not a big business myself — that are involved in multi-family real estate for all those benefits. We want strong cash flow, appreciation, and stability.

So for all the reasons why the big boys acquire multi-family, that's why we're acquiring multi-family as well. So that’s misconception number one. You don't have to be a big business. You can invest in multi-family as a smaller operator.

2. You have to be rich.

Now being rich certainly helps when you're acquiring any type of asset, real estate included. But you don't have to be rich to start investing in apartment buildings or multi-family real estate.

There are two types of investment opportunities when it comes to passively investing in multi-family real estate. They are accredited and non-accredited. Accredited investors are people who meet a certain threshold in terms of assets or income.

Non-accredited investors are obviously the people who don't meet that threshold. But there are different opportunities for non-accredited investors to participate passively in a real estate syndication or fund. We are talking in this case about passively investing, so you would be bringing your capital into the deal and then the real estate sponsor, the syndicator, or the fund manager would take that capital and use their track record, their experience, and their deal flow to invest that money and earn a good return for you and your capital.

Now obviously, on the flip side, if you don't have the capital, if you're not rich at all but you have a lot of real estate experience, you can be the person to go out and acquire the deal, to manage the deal, oversee the construction, the value-add process, and other people can invest their capital with you.

You need some capital because you want to be investing alongside the passive investors for that alignment of interest, but you don't need to bring the whole 10 million dollars. Let's say you need to do the deal. You can bring in $100,000 dollars and raise the rest if you have built a solid team and you have the experience and track record yourself.

So misconception number two that you have to be rich is false. You don't. Being rich certainly helps with everything, but there are investment opportunities for accredited and non-accredited investors alike. There's just some different legislation around that. And on the flip side, you can be active.

You can source the deals, you can manage the deals, you can work hard, invest what money you have alongside the other passive investors and really earn a good return and take advantage of the solid cash flow, the stability, the appreciation, the upside, and all the benefits that come along with multi-family real estate.

3. You have to invest in single-family homes first.

This is the path that some people have chosen to take, including myself. I started investing in single-family homes first. And then I discovered all the issues that come along with that. Getting financing was challenging, cash flow was challenging, and the stability aspect if one tenant moves out of a duplex — you lose 50 percent of your revenue — all those things made multi-family real estate investing much more appealing.

So it's a misconception that you have to somehow invest in single-family homes and duplexes and triplexes first. That's not the case at all. And let me tell you this. If I could hop in a time machine right now and go back in time to my younger self and sit down with myself at the table or whatever and say, “You know, Seth, I'm going to give you one piece of advice.” I would tell myself to skip doing the single-family homes and get right into multi-family real estate investing.

I would be so much farther ahead today than I am now if I just would have started investing in multi-family. But when I first started out, I knew nothing about multi-family real estate. I thought single-family homes were what you invested in. So I almost bought into this misconception when I first started because I knew the single-family home product. I did not know about the multi-family product. So this is a huge misconception.

I talked with a lot of people on my podcast, Real Wealth Through Real Estate. So many of the multi-family investors that I have on the podcast, a majority of them, say that they wish, if they could go back, they would have started in multi-family real estate sooner. It's just a matter of confidence and surrounding yourself with the right people.

So if you're out there just getting started in real estate investing and you're not sure if you should go multi-family or single-family homes. If you're like me, I wish I would have started multi-family so much sooner. And maybe that's the right move for yourself as well. So one piece of advice I give people is, think about where you want to end up 10 years down the road and select the right asset that's going to move you forward closer to your goals.

If you want to be more passive in terms of your investments, if you don't want to be picking up the phone from tenants, if you want to have professional management managing your portfolio, if you want the stability, the cash flow, maybe multi-family is a better asset for your portfolio than a single-family home. I know people who are successful with both, but for me and my real estate goals, multi-family is where it's at.

And like I said, I wish I could have gone back in time and steered myself more towards the multi-family route. But we can't go back in time. We can only look forward. And forward for me is multi-family real estate.

4. The deals are harder.

Now this is a big misconception. In talking with over 300 real estate investors in my podcast, we always get talking about if scaling up is easier, if things do get easier with scale, or were things easier back when they were doing smaller deals. Almost every single person I’ve had on the podcast says the more you scale up, the easier it gets. And there's several reasons for this.

Well, number one, just finding the deals, doing the underwriting, building relationships with real estate brokers and sellers takes the same amount of phone calls to build a relationship with a person selling a duplex as it does with somebody selling a 200-unit apartment building. It's the same time on the phone. It's the same types of conversations we have. It's just we're dealing with a larger asset. So in that case it's not harder. It's the same amount of work.

In terms of underwriting deals, once you have a process in place, a multi-family is a lot more predictable because its value is based on the income approach. So it's a totally different way of valuing real estate. And then when it comes to management a lot of people self-manage with single-family homes. And if they do hire a property manager, they're paying 10 to 12 percent of their gross rents. With the scale, it becomes easier to manage because you have full-time staff.

Let's say on a 150-unit property, your management fees are significantly less. And the property actually supports the full-time maintenance staff and the full-time leasing agents. So you actually end up with a better product because you have people dedicated to that property rather than somebody managing 100 different properties or a maintenance person running around an entire portfolio of 300 properties. You have your maintenance team on site and they know that property like the back of their hand. That's going to give you a better product down the road.

So is multifamily harder? No. Is it a different way of valuing real estate if you're used to single-family homes? Yes, but it's just a matter of educating yourself and putting yourself in the right sphere of influence with other people being successful in that space.

Multi-family real estate is an art that you learn, just like it is investing in single-family homes. It just takes dedication. Once you know the material and you do your first couple deals, you won't look back and you will wish you jumped into multi-family a whole lot sooner.

5. You have to do it alone.

This is something I fell victim to when I was doing my single-family home investing. I was thinking very one-track-minded. I thought I had to acquire all the properties and not partner up with people. I needed to have ownership of the portfolio. This is not the case. And especially so with multi-family real estate.

One of the beautiful things with multi-family is you're able to partner with other people. And you can actually have experts dealing specifically what they are experts in. For example, let's say you are an expert underwriter. Spreadsheets is the name of the game and this is what you're the best at. In a multi-family deal, you have more meat on the bone so you can actually have an expert capital raiser raise all the capital if that's not your thing.

You can have somebody with the construction management experience managing all the value-add and the renovations if you're the person doing the underwriting. Or maybe you have the deal flow but you don't have the underwriting experience. Well, you can just build a team and have all the deals roll in and then pass them off to somebody to underwrite.

I think this is a much better way of doing things rather than with a single-family home. Oftentimes, you're wearing six different hats sometimes, all in the same day, sometimes all in the same hour! And, you know jack-of-all trades-master-of-none. But with multifamily, it's more of a team sport.

A multi-family deal doesn't get done by an individual. It gets done with the team. So I think this is a big strength with multifamily. If you're somebody who's great at raising capital, well there's somebody who's great at underwriting who probably doesn't have that skill set. So you guys can partner up and then be a whole lot stronger and have that exponential growth together.

So you don't have to do it alone. Multifamily is made for teams. It's made for teamwork and I think you're a whole lot stronger when you do take that team approach and you'll end up with a better product and it's a whole lot better for your investors as well.

The Bottom Line

So these are the five common misconceptions about multi-family real estate. I really wish I knew these back when I was first getting started. But now you know the common misconceptions and I hope this will save you a whole lot of time and really bring some clarity to your real estate investing journey.