CHAPTER 2 Success ful and unsuccessful people do not vary greatly in their abilities. They vary in their desires to reach their potential. -JOHN MAXWELL  
 
 
Advantages of Multifamily Ownership  
 
 
 
 
Ownership of multifamily properties offers investors a number of advantages over ownership of single-family properties. One of the chief elements all investors are constrained by is time. The deployment of investment capital into larger assets such as multifamily properties affords investors the opportunity to make more efficient use of their time. Another key advantage is the liquidity of the multifamily market, which has a steady supply of inventory offset by a constant demand for that inventory. Additional advantages of multifamily ownership include reduced transaction costs, the concentration of units, more efficient use of management and labor, improved tax and record keeping, and the divestiture of the property.

Time and Efficiency

One of the most valuable commodities we possess is our time. Each one of us has the same 24 hours available in a day, no more and no less. It stands to reason then that we want to make the best possible use of our time. From a purely practical standpoint, it only makes sense that if you can identify and subsequently purchase a group of units in a single transaction, this process is by its very nature more efficient and requires less time than purchasing several units in multiple transactions.  
Say, for example, that you set a goal to acquire a total of 24 units over the course of the next 12 months. This means that if you were to focus solely on single-family housing, you would have to purchase an average of two units per month. Experience has taught me, and I am sure many readers as well, that before purchasing even one unit, you will probably look at as many as 10 units, or possibly even more. For the sake of simplicity, we will assume that in some form or another, you will review an average of 10 properties for every one that you purchase. This means that each and every month for the next 12 months, you will review approximately 20 properties, or a total of 240, to achieve your goal of purchasing 24 units. I am assuming that many readers have full-time jobs and invest in real estate to supplement their existing income in an effort to build long-term wealth. If you have a full-time job, the amount of time and effort required to review this many properties simply is not practical. Even if you are available to invest and manage your real estate holdings on a full-time basis, if you spend all of your time looking at potentially suitable properties, there is little time left for anything else. The exception to this might be if you are an active investor with a wellestablished and finely tuned network in place and a steady supply of prospective properties in your pipeline. This type of operation would likely be assisted by a support staff, as well. If you are just getting started, however, you will be largely dependent on your own efforts and therefore will be somewhat limited in the amount of time you can spend reviewing properties.  
Now let us take those same 24 units and shift our focus to multifamily properties. You could choose to acquire the 24 units in any number of ways. For example, you could purchase all 24 units at once, or you could buy two 12-unit properties, three 8-unit properties, six fourplexes, or some combination of properties. Let's assume that for your 24 units, you were able to locate a 12-unit, an 8-unit, and a fourplex. This would give you a total of 3 transactions over the course of the year as opposed to 24. Using the same assumption as we did for single-family housing, you would have identified and reviewed a total of 30 properties rather than 240. Although it may be argued that it takes longer to identify multifamily properties, once they are located your time is spent much more efficiently than on the arduous task of purchasing 24 units individually. Even if you took your time and finally purchased a 24-unit property in Month 12, you still would come out much further ahead.

Market Liquidity

Another key advantage of owning multifamily properties is that the market for them is fairly liquid. The availability of both single-family and multifamily properties will vary widely from area to area. Supply and demand, as well as proximity to a major metropolitan area, are the primary determinants of inventory availability. For the benefit of newer or less experienced investors, the term inventory can be and is applied to real estate just as it is to any other product that is marketed. Inventory is the supply of goods or products that are available to the customer, whether it is groceries in a supermarket, chemicals in a refinery, or housing in the real estate industry. The number of readily available single-family units on any given day far exceeds the number of available multifamily properties. You may initially think this is an advantage. Further observation, however, would suggest that while the physical supply of single-family houses may be greater, this is largely offset by greater demand. While literally thousands of people are in the market every day searching for a home to live in, the number of real estate investors such as yourself is much more limited. This is not to say that you will be the only one looking at a prospective multifamily property. Certainly there is competition in the marketplace. In summary, it can be said that supply and demand for both single-family and multifamily properties are generally in equilibrium at any given time.

Transaction Costs

With each and every purchase, some type of transaction costs will be incurred. These costs include lender and attorney fees; third-party reports such as appraisals, surveys, and possibly environmental and engineering inspections; title fees; and the like. Consider the earlier example of the 24 units. Imagine the time, energy, and expense of purchasing 24 separate single-family units, each having its own closing. That's 24 separate sets of loan documents that must be prepared by 24 respective loan departments, 24 sets of documents for attorneys to review, 24 sets of third-party reports that will be required, and on and on and on. Now compare this to the purchase of the 12-unit, the 8-unit, and the fourplex. Instead of 24 closings, you now have only three. It is true that some of the fees are based on the size of the loan or the property value, but this actually works to your advantage. On larger deals, the parties involved can afford to be more competitive. They want your business and will often be somewhat flexible in the fees they assess. The smaller single-family deals will require almost as much work, and therefore there is not as much room for negotiation. If you have ever been through the closing process, I think you will agree that 3 closings as opposed to 24 represents a much more efficient use of your time.

Concentration of Units

Having your units concentrated in a specific area will also enable you to make more efficient use of your time. Once again, consider the 24 units as an example. If you live in a small town or community, chances are your rentals will be in close proximity to one another, so this will not make much difference. However, if you live in a major metropolitan area, and you are not careful, you may find yourself buying property on the other side of town because it represents a fair value. Do this two or three times and you will be endlessly zig-zagging back and forth across town, through traffic, sometimes in adverse weather, and at who knows what time of day or night. Maintaining your focus in a specific area will once again allow you to make more efficient use of your time. This is not to say, however, that you cannot own apartment complexes located in different parts of the city. If you own, for example, a 52-unit complex on the south side of town and a 98-unit complex on the north side of town, you will most likely have on-site staff to assist you-and in this case, you are simply commuting between 2 properties, not 24.

Management and Labor Considerations

The same principles apply to the most efficient use of your property manager's time, as well as that of any additional staff you may have, such as fullor part-time maintenance personnel. If you are managing only the 24 units we have been using for an example, chances are you are doing much of the work yourself. With 50 or more units, however, you will want to have someone who is capable of helping you operate your property. Depending on its size, your assistant may serve a dual role by not only functioning as a property manager, but also performing some of the light maintenance. If the units are all situated at a common location, this will greatly simplify things for your staff. Materials, supplies, and equipment can all be kept readily available and easily accessible for your personnel's use.

Tax and Record Keeping Considerations

At the risk of sounding redundant, record keeping will be much easier for a multifamily property with 24 units as opposed to 24 single-family houses. If you have ever filed an Internal Revenue Service (IRS) Schedule E form (or any other tax-related form for that matter), you know that it can be a very tedious and time-consuming process. With 24 single-family houses, you will need to track...