Single or multi
# Entrepreneurs of the Week - Amitai Kenrik, Lior Stein and David Pat
# Post # 5
What happens and it? Fancy a debate?
So you have $ 100K and you're already dying to make your first deal in the US.
The developer offers you two deals-
Purchase of a Singel property (private home) that offers you an 8% annual return as a sole investor.
או
Log in as a partner to purchase a Multi property (apartment building) that offers you an 8% annual return.
So what do they say? Single or Multi?
Good question…..
Seemingly, it does not matter, the numbers are similar… ..
But a partnership? I do not know the other investors .. What do I need such a partnership?
So let’s talk about a number of key factors that influence our decision: profit, time, risk, management, expenses, emotion and more.
profit -
If this is the only parameter to consider then really there is no difference between the transactions, on paper the developer expects the same profit.
So this is …… it's true… but .. there is also a risk.
Of course in reality the numbers will not always be equal so we will decide what is more true for us.
Regarding the profit on the sale, the method of calculating the sale price is different. In the single, the price is determined according to market prices (according to the characteristics of the property - area, size, etc.). In Multi there is not so much market to compare to and therefore the sale price is determined according to CAP RATE. We will not go into an in-depth explanation now, we will just explain that the performance of a multi-property affects its price and therefore if we improve its performance (higher rent, smaller expenses) its value will increase. In pure Hebrew, we have a certain ability to control the selling price.
Risk -
Brentle has a risk. We talked about it in post # 3… Tenant who does not pay, fire, flood and more.
When I own a single property and the tenant does not pay I absorb 100% of the loss and have no income that month. On the other hand, when I own a percentage of a building with several apartments and a tenant does not pay, I absorb the relative share of that tenant (depending on my share in the partnership) ie if there are 10 apartments in the property and 9 with paying tenants but one apartment with a non-paying tenant, still 90% of the apartments will pay and I will only lose the relative share of the income from that apartment with the wayward tenant.
Less terrible .. I reduced exposure, reduced risk ..
Time -
Buying a multi simply takes more time.
More time for inspections, more time to form a group of investors, more time to renovate and rehabilitate the property (replacement of tenants who pay little) and also, more time to sell the property.
Management -
Tachles, in Multi it is easier for the management company - everything is in one place. Less travel and less complex. But, there are things that size creates complexity such as - public areas, parking, laundry room, garbage removal and sometimes a gym or pool. In any case, you need to make sure that your management company is able to absorb the amount of apartments and the complexity of the building that it will manage.
For the individual investor, this matter is less significant.
Expenses -
Ostensibly, I would think that Molti has less spending. There is only one roof, one heating and cooling system (depending on the property), insurance for one property and more. But life proves us otherwise. More apartments means more expenses (more users on fewer systems - HVAC, AC, etc.). The insurance company takes care of reducing its risk by increasing the premium. Because there are many tenants there is also more turnover (usually, the apartments in the multi will be small and therefore the tenants are more mobile in relation to the property with family) and every tenant replacement costs money - locating and signing a new tenant, renovating the property between tenants (Rent ready) Without income from the specific apartment. In short - spending is growing.
Emotion -
Do not be sentimental to me now.
Just, seriously. There are quite a few investors who do not like the issue of partnership. And I understand why you're afraid to partner with people you do not know. Only in practice your partners do not have the ability to screw you or run away with the money. They are all partners like you in the same transaction and the person who manages the transaction is the entrepreneur (personally I recommend letting the entrepreneur manage the affairs and not try to manage with the partners).
In any case, when this partnership lowers my risk, it is a good partnership - it protects me and reduces possible losses for me.
More -
Another point to understand when entering into a multi-transaction is that you are not alone. If you decide you are no longer interested in the property, you have no ability to simply decide to sell the property (as in the single). You are part of a group so you can sell your share in the partnership and not sure you will see from it the return you could get if you were selling an entire property.
So what did we learn?
We have learned that as with many other things we have pros and cons in both single and multi, so the decision will be based on the value everyone is looking for in their investments.
It depends on what the investor is looking for, it depends on the numbers and returns, it depends on your ability to manage and refer, it depends on the level of risk you are willing to take, while I am interested in the project, your investment strategy and ultimately emotion.
Hope I helped you.
I would love for comments, questions, comments and additions.
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