Investing in any type of property in the Houston area requires careful consideration. No investment is problem-free, but some are easier than others. For instance, investing in a single-family home requires less effort than investing in a multi-family property. With a single-family home, you only need to find one tenant every few years and handle a moderate amount of repairs. With a multi-family property, you’ll be constantly screening tenants, checking credit, filling vacancies, renovating, fielding repairs, and improving the property.
Multi-family properties are clearly an expensive and time-consuming investment. However, there’s a good reason investors acquire and retain multi-family properties: they’re more profitable long-term.
Multi-family properties yield more profit
Some investors don’t realize short-term gains cost more until it’s too late. Short-term gains give you immediate gratification, but they cost you more in taxes and fees. If your strategy is to buy multiple single-family homes, whether you rent them out or flip them, you won’t make as much as you could by investing long-term in a multi-family property.
Flipping houses is often a strategy used to make quick cash. Smart investors don’t just think about how to make ends meet next month. For instance, Sterling White explains to the BiggerPockets audience that he views his multi-family investments as a long-term strategy to support himself 10, 20, or even 50 years down the road. He’s never going to sell his multi-family properties because he understands that by holding onto them, his potential profit is larger.
While it might make sense to flip or sell single-family homes (in the right market), it doesn’t make sense to flip or sell multi-family properties.
A multi-family property is a long-term investment
Reality TV paints a Hollywood-style picture of what it’s like to flip real estate for a profit, but fails to tell the whole story. When you see somebody on television talk about gross profit from a flip, it sounds like an enormous amount of money. Who wouldn’t want to invest in real estate after watching someone report a 5-figure profit? The problem is that gross profit isn’t net profit, and only net profit counts.
If you’ve purchased a multi-family property in the Houston area, don’t sell it to make a profit. Keep it to generate wealth. If you hang onto it long-term, you’ll see a larger net profit for several reasons:
- You’ll generate consistent income from multiple tenants. Once you pay off the mortgage, rental income will become pure profit. This requires patience. It may be twenty years before you see true profit, but that’s why it’s worth hanging onto. You want to retire someday, right?
- Hanging onto your multi-family property for the long haul avoids losses like closing costs, transaction fees, taxes, and commissions. How many times do you want to see a large chunk of your profits go to pay taxes and commissions?
- The quick cash you could make from flipping a multi-family property doesn’t come close to what you’ll make when your property finally becomes an asset for generating passive income.
Homeownership rates are declining
In 2018, homeownership rates dipped down to recent 20-year lows. Over the last decade, a large number of people have started renting apartments in major metro areas to be close to dining, shopping, and other conveniences. The rising demand for apartments is in part due to Millennials who can’t afford to buy a home, Millennials who are happier living in a small space, and the older crowd (55+) downsizing to a simpler lifestyle.
Part of the reason home purchases are dropping is because income qualifications for a mortgage are higher than ever. As of 2017, in some areas, qualifications are rough: minimum income requirements are almost 40% higher than what they were in 2013.
Houston’s apartment market remains strong
If you’re worried about the market for apartments with the devastating effects of Hurricane Harvey, you’ve got nothing to worry about. After the storm hit, apartment rentals got a big boost from those who needed a new home. Since then, according to ApartmentData.com, the occupancy rate has remained above 89%. People were expected to return to their homes, but instead, they remained in their apartments.
New constructions have also slowed down. In 2018, roughly 5,000 multi-family units were built in the greater Houston area. That’s a significant decrease from the 55,000 units built between 2015-2017. The slowing down of new constructions has brought supply in line with demand. For investors, that means you won’t need to offer free rent or other perks just to get tenants.
Multi-family properties are a long-term wealth building strategy
The point of buying investment property is to make money, but wouldn’t you rather buy property that will help you build wealth? If you’re extremely good, you can get rich by flipping houses, but you’ll never become wealthy that way. To build wealth, you need patience. You need to build a foundation that runs like a well-oiled machine. A foundation that, once paid for, generates income for you.
A property management company will help you build wealth
One important component of a wealth-building machine is a property management company. You’ll never build wealth with real estate if you’re running around personally managing your investments.
It takes time and energy to market your rentals, screen applications, and perform background checks. Once you’ve got tenants in a multi-family property, your time will be spent chasing late rent and dealing with excuses, handling emergency repairs, and dealing with complaints.
At Green Residential, we specialize in running rental properties. With more than thirty years of experience, our experts are pros at handling those late-night repair calls. We’ve got partnerships with local trusted maintenance and repair specialists. Since we deal in volume, we get their best rates and pass those savings onto you.
If you’re serious about turning your rental properties into a source of wealth, contact us today for a free evaluation. Find out how we can help you grow your real estate income and achieve the passive income you’ve always wanted.