Why Are Multifamily Investments Easier to Finance?

When individuals consider investing in real estate, they tend to look toward single-family homes. The reason behind this impulse is simple: these homes cost much less than multifamily structures. In fact, investors can purchase a single-family dwelling for as low as $30,000 in some markets, whereas multifamily buildings can easily cost millions of dollars.

What may surprise some investors is that it can be much easier to secure financing for a multifamily structure than for a single-family home. This stems from the risks involved. Banks see multifamily structures as a source of consistent cash flow: even if the building has a couple of vacancies or tenants who miss their payments, the other units still provide cash flow. On the other hand, if a single-family home is left vacant or a tenant fails to pay, then the net income falls to zero.

For this reason, the likelihood that individuals will foreclose on an apartment building is much lower than with a single-family dwelling. As a result, banks see multifamily buildings as a less risky investment.

The Tortoise and the Hare Applied to Real Estate Investments

When novice investors enter the multifamily real estate market, they tend to go after properties in the “hot” markets and in metropolitan areas with the potential for explosive growth. This approach to investing represents the fast approach to making a profit. These investors go after the No. 1 markets without thinking about the volatility that may have led to the sudden jump to the top. Unfortunately, sudden jumps can precipitate sudden falls. In order to invest successfully in a volatile market, individuals need to have excellent timing. 

Conversely, the slow and steady approach to investing relies on predictability. When investing in predictable markets with slower but steadier growth, investors can make reliable forecasts that result in steady and consistent returns. 

It is helpful for all investors to think in terms of market conditions and market fundamentals. The “fast” approach is concerned with market conditions and the “slow” approach with fundamentals. Investors also need to listen to experts. For example, look to Texas and the cities of Houston and Dallas. Analysts predicted that falling fuel prices and market conditions would cause a downturn. However, in reality, these cities have remained steady for investors due to overall job growth and housing market expansion.