The Mystery ???? of Multifamily????—Answers for New(ish) Investors w/ Shannon Shue

A growing number of my single-family clients are asking about multifamily properties:

Hey Shannon, with house prices so high, do you think there’s a bargain in buying a duplex, or a triplex, or a quad?

I’ll tell you what I tell all of them—no, there are no bargains right now.

Multifamily doesn’t mean more value—at least not in the short term

There is tremendous value to be had from investing in a multifamily property, but not if you’re operating on a five to eight year timeline. 

If you want to start investing in multifamily property in this environment, you need to be thinking buy and hold with a time horizon of at least ten years.

Here’s the deal…

First-time investors mistakenly think the multifamily market is this sleepy corner of the real estate world, because it’s not headline news—you don’t see the LA Times or CNN talking about the housing crisis in terms of triplexes, it’s always standalone single-family homes. 

But the reality is the supply of multifamily properties is just as low as the supply of single-family properties—if not lower.

That means prices are high, competition is fierce, and (depending on your situation) you might need to be even more aggressive buying a multifamily than you’d be buying a single family.

Cash is king…and queen…and prince…hell, it’s the entire royal court

For first-time home buyers—or residential buyers in general—being able to put a big chunk of cash down isn’t always critical. Sometimes you can get by with only 10% or 15% down.

In the investing world, that’s not the case. 

If you already own your primary residence and are looking to purchase a multifamily as an investment, you’ve GOT to be able to throw down at least 25% cash in this market. 

Using this duplex in Seattle as an example (listed at just under $1.5M), you’d need $375,000 in cash on-hand to make a competitive offer…and that assumes it sells at the listing price and not over, which is a H-U-G-E assumption right now.

Owner-occupy

that, you CAN sidestep a big down payment IF you’re willing to do an owner-occupy situation—in other words, you’re buying a multifamily property as both an investment AND a primary residence. 

When you purchase a multifamily property as both an investment and a primary residence, it enables you to obtain residential financing (versus investor financing). 

This type of financing is more accommodating for buyers who don’t want to (or can’t afford to) put as much cash down…you’ll see residential loans covering anywhere from 80% (the traditional amount in an 80-20 loan) to 95% of the sale price.

But, if you’re NOT going to occupy your multifamily property, you’re ineligible for this type of financing.

You will pay more than you want. You will be cash-flow negative.

Just about nothing is cash-flowing in Los Angeles, San Francisco, California in general, or any strong real estate market right now. 

A combination of high purchasing prices, general maintenance costs, and below-market rents (due to COVID-related prohibitions on rent increases and eviction moratoriums) mean multifamily investors are bleeding cash (albeit slowly) each month on new acquisitions.

Do NOT be alarmed by this. 

If you remember last month’s email (you know, the one about my condo in Colorado?) an investment property can be cash-flow negative for several years before it becomes cash-flow positive. 

As long as you’re operating on a long-time line (10+ years), being cash-flow negative in the first few years of ownership shouldn’t be concerning. With enough time, you’ll become cash-flow positive and your property will appreciate, the combination of which will more than offset a few years of operating in the red. 

And when it comes to overpaying?—Well, that’s just the nature of the beast in this environment.

High demand and low supply mean sellers are not only seeing multiple offers over-asking, but they’re seeing multiple offers with no contingencies (no appraisal contingency, no inspection contingency). 

Without that appraisal contingency, it’s almost a total guarantee you’re going to pay more than what the property is currently worth…I know that’s not what you want to hear as a multifamily buyer, but it’s the cold, hard truth.

So, what are your options?

Option #1 is, you can hope rising interest rates slowly but surely quell demand for multifamily property, which will drive down prices and make it easier for you to find that bargain you’ve been dreaming of.

(Note the emphasis on the word “hope” my friends…it’s there for a reason.) 

Option #2 is, you take a long-term investor mentality, accept that there will be some short-term pains, but that the juice will—ultimately—be well-worth the squeeze on your decision to buy.

(Which it will be.)

-Shannon