SPECIAL GUEST ARTICLE By Wright Thurston
SHORTCUT TO FINANCIAL FREEDOM WITH MULTI UNITS
A recent landlord survey indicated that visitors to this site are evenly divided on whether they would prefer owning single family rentals instead of multi-unit buildings. The author of this guest article makes an argument for why he favors multi-units and small apartment buildings.
Let's look at some of the reasons why multiple units are a shortcut to financial freedom. If one house is a good investment, would not two, four, six or eight houses be even better?
Now think of these four or six houses as being a four-plex or a six-plex. Here are seven different reasons why multiple units are a shortcut to your financial freedom.
1) Less Cost Per Unit
The first house I purchased cost $63,000. The first income-producing property I bought, a duplex, cost $105,000. Notice the difference in the actual cost per unit. You need to take the cost per unit into consideration.
If you're in a single family house and it has a $63,000 mortgage at 12%, your payments are about $650 a month. Since it's just your family living there, just one wage earning family will be making the payments.
In the case of the duplex, even though the cost was significantly more than my house, the actual cost per unit was $10,000 less, or about $52,000 per unit. There were also two families living in the duplex and two families paying rent. Since my per unit mortgage amount was less, the chances of collecting enough rent to cover the mortgage and expenses was increased. This is an important factor to consider as you search for your properties.
2) Improved Vacancy Factor
If you have a single family home and it's vacant, it's 100 percent vacant. You have no one to pay the bills and it becomes a negative cash flow. If you have a four-plex and one of the units is vacant, now you're looking at a 25 percent vacancy factor. And if you should have a 20-plex or something larger, then your vacancy factor would be only five percent or less. The more units you have, the less impact the vacancy factor will have on your cash flow.
3) Better Financing
It is often difficult to obtain financing for buildings larger than four units. If you're a seller, this might seem discouraging. But as a buyer, it provides a golden opportunity.
It allows you to negotiate much better financing and much better terms. If the sellers could get financing on their units, they would probably refinance it themselves and pull out some cash. Often, they may not be able to get the funds they need on a timely basis. Therefore, they may offer you terms as a buyer that normally may not be available.
They will probably have to take their equity and carry it in either a second or third mortgage position. They will be more likely to let you pay back their equity over a longer period of time. Even though they might want a balloon payment in 10 years, you can usually make the payments as if you were paying it off over a 30-year period. This will make your monthly payments lower. You'll also be able to ask for a lower interest rate on the seller's equity. So the terms and financing on multi-units can be more advantageous.
4) Simplified Management
When I used to own a single family house, a duplex and a triplex, I was running all over the place. I had to do every-thing myself and it was very time consuming. When I started buying six and 12 unit apartment buildings, the tenants were all located together. I was able to hire other people to help out. They were the ones plunging the toilets.
I found that if I had 10 units or more, I could hire a full-time person. What a joy it was to have them take care of most of the responsibilities. Of course, I still had to manage the managers. I had to pay attention to details and make sure everything was running properly. But because other people were assisting me, I had more free time to look for new investments.
5) Less Expense
You will have less expense per unit. Your costs are reduced and they are smaller. When I had several single family homes and had a maintenance problem, the plumber or electrician or whoever charged quite a bit per hour. In fact, they charged a fee just to look at the problem. Many times, even though they might have been there for only 10 or 15 minutes, I got billed a tremendous amount of money.
When your units are all in one place, you are aware of both the minor and major problems. So when the electrician or plumber stops by, he can work on all the problems at the same time. Your costs are then greatly reduced.
You'll also have more "staying power" with multiple units because the rent monies you have collected will allow you to have a reserve fund for emergencies. With just one tenant, a $500 emergency repair might wipe you out. With multiple units, it is much easier to absorb those unexpected costs.
6) More Positive Cash Flow
The cash flow is substantially greater. If your cost per unit is less, and your vacancy factor is less, and you've been able to get better terms, lower interest rates, longer payment periods, and your management saves you time and expenses, then of course there's going to be more money left over.
After the first few months of operation, your monthly rents should take care of your debts and expenses. You'll have more positive cash flow and you'll be able to use it any way you want.
7) More Time To Do What You Really Want To Do
Multiple units will give you more time to do what you really want to do. Because time you spend in management is less and positive cash flow is a lot more, you'll reach the point where you can say good bye to your current job. If you want, you can become a full-time real estate investor. Regardless of your occupation, as you get more and more units, you will have the kind of financial freedom you're searching for.
Agree or Disagree? Single Family Rentals or Multi-Units, Which is better? Send comments to firstname.lastname@example.org. We may share your comments on this website.
Wright Thurston has a complete course on buying multi-units that I recommend to anyone considering buying multi-units and small apt buildings. His course is titled: "Diamonds In The Rough" (Making Money with Multi-Units)
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DIAMONDS IN THE ROUGH
How To Buy Multi-Units and Small Apartment Buildings with little money and build financial independence faster with multiple units.
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