In this episode of Get Real Wealthy Season 2, Quentin talks about why multifamily apartments are better real estate investments.
Quentin says that the difference between apartments is that a one to four-unit apartment is considered residential while five-plus units would be commercial or multifamily. In the residential game, financing is different based on the number of units. When you’re doing financing, you’ll find out that the appraisal is different on a one to four-unit property than it is on a multifamily property. In a one-to-four-unit property, you have a comparative method, where similar properties in the vicinity are compared for price. For multifamily property, it’s based on the Income Method; the net operating income of your property is going to define the value of the property. The type of financing you’re going to get on that property will be based on the debt coverage ratio.
For financing rental properties, usually, the amount of equity you can release in a property is going to be based on what the rents are and what your income is, and that will allow you to release some equity in the property. In an apartment building, as it’s based on the net operating income, oftentimes, you can release that equity a lot easier in a multifamily building. He adds, “one of the reasons why I like the multifamily space is the ability to use debt coverage ratios and then operating income to be able to release equity and take that equity and reinvest that into more buildings.”
Quentin further says that another thing he likes about multifamily is that it’s a small group of people. People know each other, and it takes time to develop the relationships that allow you to invest in those properties because there aren’t many such buildings. He says that another good thing about multifamily buildings is the CMHC mortgages. This allows you to have 30, 35, and 40-year amortizations. It lowers your monthly costs and allows you to qualify for more of a mortgage. Another benefit of multifamily buildings is that there’s a lot of demographic growth and that’s driving demand. Additionally, you’re often buying apartment buildings for lower than the replacement costs.
He further says, “Another thing I want to say is the repositioning the asset, we do the BRRR strategy of apartment buildings; buy, reposition, refinance and then continue to rent.” Quentin says that cap rates are affected by three factors; location of the asset, interest rates, and the condition of the building.
In conclusion, he says that take a look at your portfolio. See if you want to invest in multifamily apartment buildings, and remember, Get Real Wealthy.
Important Links and Resources
Quentin D’Souza is the Chief Education Officer of the Durham Real Estate Investor Club. Author of The Action Taker's Real Estate Investing Planner, The Property Management Toolbox: A How-To Guide for Ontario Real Estate Investors and Landlords, The Filling Vacancies Toolbox: A Step-By-Step Guide for Ontario Real Estate Investors and Landlords for Renting Out Residential Real Estate, and The Ultimate Wealth Strategy: Your Complete Guide to Buying, Fixing, Refinancing, and Renting Real Estate.