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Single-family homes are always profitable as rental properties. They attract long-term tenants. They appreciate in value. Rents are typically high. There are dozens of good reasons to rent out single-family homes.
That’s why you have them.
But, those multi-family investments offer a lot more flexibility. There’s less vacancy risk. More cash flow. You have several different income streams, and you’re taking advantage of better rates on maintenance and management per-unit.
Maybe it’s time to diversify.
Maybe it’s time to transition your portfolio to multi-family rental homes.
How do you do it? Should you buy a building? Consider a 1031 exchange? Physically convert a four-bedroom home into a duplex?
Let’s consider all the possibilities and talk about how the success of your investment portfolio may rest upon transitioning into the multi-family rental market in Hampton Roads.
Hampton Roads Multi-Family Rental Investments Make Sense
What do your investment goals look like? For some real estate investors, single-family rental properties make the most sense. Maybe that’s what best reflected your own investment goals for a while. But, strategies change, and so do definitions of success. You might be rethinking what types of properties you buy, and that’s a healthy way to grow and scale a portfolio.
Here are some of the reasons that we believe multi-family properties are such a good idea for real estate investors in the Hampton Roads market.
Economies of Scale
One of the most significant advantages of multi-family properties is economies of scale. Managing ten units in a single building is generally more cost-effective than managing ten separate single-family homes. This efficiency can lead to better profit margins and streamlined operations. Instead of sending HVAC techs to 10 different locations during your preventative inspections, they’re visiting a single building. That’s going to save you money and improve your relationships with vendors. Professional management will be more cost-effective, too. Your property manager is likely to give you a discount when you bring them a portfolio of 10 units instead of two or three single-family homes.
Increased Cash Flow
It’s hard to argue with marking more money. And, that’s what multi-family properties can generally do for you. Multi-family properties often generate higher cash flow compared to single-family homes. With multiple units under one roof, even if one or two units are vacant, the income from the occupied units can cover expenses—a luxury often not afforded with single-family rentals. Even a duplex brings in double the income that a single rent check would.
Portfolio Diversification
Investing in multi-family real estate diversifies your portfolio beyond single-family homes. This diversification can mitigate risks and create a more resilient investment portfolio, less susceptible to market fluctuations specific to single-family housing.
Less Vacancy Risk
Renting out a single-family home, your entire income dries up when your tenant moves out. Vacancies are incredibly expensive. They’re no less pleasant when you’re renting out multi-family units, but at least you have income from other units.
Better Financing Terms
Lenders typically view multi-family properties as lower risk due to their steady income potential. Consequently, investors may access more favorable financing terms, including lower interest rates and higher loan amounts. Many lenders will consider the income you’re likely to earn when offering loans.
How to Transition from Single-Family to Multi-family Rentals
We’re going to talk about the general things you’ll need to do when transitioning from single-family rental homes to multi-family investment properties, and then we’re going to suggest three specific ways to do it; new acquisitions, 1031 exchanges, and physical renovations.
First, you’ll want to educate yourself. Before jumping into multi-family investments, take the time to educate yourself about the differences and nuances in managing these properties. You’ll have to market them differently, lease them differently, and think of new ways to give yourself a competitive advantage in the market.
You’ll also want to conduct thorough market research to identify high-demand areas for multi-family rentals. The neighborhoods might look a little different than those neighborhoods where you're your single-family rentals. Consider factors like employment opportunities, population growth, and local amenities, which can impact the desirability and valuation of multi-family properties.
It’s okay to start small, especially if you're new to multi-family investing. Consider starting with a smaller property, such as a duplex or triplex. This step allows you to learn the ropes of multi-family investment on a smaller scale before taking on larger investments.
Acquiring New Hampton Roads Investments
One obvious way to transition into the multi-family market is to buy multi-family properties. You can buy specific units. You can buy an entire building. You can buy a duplex or a set of attached villas in a master-planned community. There are options.
If this is the path you want to take towards more multi-family rentals, we suggest you explore various financing options to find the best fit for your investment strategy. Multi-family properties often qualify for different types of loans, such as government-backed options like FHA or VA loans, which may offer advantageous terms. If you’re planning to live in one of the units that you rent out when you buy a building, you’ll likely qualify for a government-backed loan. This can open up a lot of possibilities.
Pay attention to the building if you’re buying one. You’ll want to know how it has been rented historically. What were the rents? How long did tenants stay? Who is in residence now, and what do their lease agreements look like? These are all the due diligence questions you’d ask before making any investment, but with multi-family properties, your inspection reports and condition reports are more important than usual. If there’s a mold problem or a structural issue, those problems impact multiple tenants, not just one.
Leveraging a 1031 Exchange
If you’re thinking about trading in your single-family homes for multi-family properties, the best way to do this is through a 1031 exchange. This is typically used by investors who want to defer taxes, but it can also help you transition into different property classes. It’s named for Section 1031 of the IRS code. Property owners can defer the taxes that may be due on the sale of a property by investing those profits into the purchase of another property.
Sell your single-family investment properties and use the money you earn on those homes to buy multi-family buildings or units. It allows you to invest in new properties without putting up a lot of capital. It also helps you defer those capital gains taxes you’d pay on the sale of the single-family homes.
You have to exchange like properties for like properties. That doesn’t mean it’s single-family home for single-family home. It simply means you cannot sell a rental property and avoid taxes by purchasing a vacation home for your family (although that would be nice). Instead, you need to buy another income-producing property with a value that matches or exceeds the property you’ve sold.
If you’re going to transition from single-family rentals to multi-family rentals with a 1031 exchange, you have to identify the property or properties you want to buy within 45 days of closing on the property you sold. You also have to close on the new deal within 180 days of selling the original property. The entire transaction must be completed within those 180 days, otherwise you’ll be liable for taxes. And always use a qualified intermediary to ensure you don’t touch any of the proceeds from the sale.
Renovating Properties
Perhaps you have a large single-family home that you’d like to turn into a property with multiple units. This is doable and again, it’s economical because it means you don’t have to buy something new. Hampton Roads does have strict zoning laws, however, and there will need to be careful attention to permitting and other requirements before you begin knocking out walls and adding bathrooms. Get to know the zoning laws, the safety requirements, and the restrictions that may be in place. Working with a qualified contractor will be essential.
Local and state governments are taking the availability of affordable housing seriously. There might be more flexibility when you can establish that you’re providing more inventory in a crowded market when you make this conversion. What’s allowed and what’s prohibited will also depend on the specific neighborhood you’re in. Lot size will matter.
If this is the way you want to go in converting your portfolio, make sure you are surrounded by experts who know the local laws and have done this before. Your Hampton Roads property manager can be an excellent resource, especially when it comes to gathering a legal team, contractors, and insurance agents.
Let’s talk about turning your portfolio of single-family homes into a stronger and more profitable portfolio of multi-family rentals. As you can see, there are various ways to do it, and we’d love to help. Please don’t hesitate to contact us at Doud Realty Services, Inc. We provide expert property management in Norfolk, Portsmouth, Hampton Roads, as well as surrounding areas such as Virginia Beach, Suffolk, Chesapeake, and Newport News.