More people are on the move than ever before, making a short team lease arrangement highly desirable.
Economies of Scale of Multifamily Real Estate
We’ve covered cash distributions, market and forced appreciation, and risk reductions as major advantages to passively investing in multifamily syndications. Yet another advantage comes as your investment grows: economies of scale.
Economies of Scale: The One Serves the Many
The concept of economies of scale is easily understood when we compare investing in a single-family home compared to a multifamily home.
Drip...drip…! Do you hear that? The roof has sprung a leak! Naturally you hire a repairman to fix it.
- In a single-family home, you just fortified the living space of 1 family.
- In a 200 unit apartment multifamily home, that single roof repair fortified the living space of 200 families.
The cost of repair of one multifamily building is significantly less than that of 200 individual single-family homes. You’re taking advantage of the economy of scale!
This is true for any maintenance and upkeep needs your multifamily property needs, from the roof to the groundskeeping, from the boiler system to the sidewalks, and everything in between. One component serves the benefit of multiple units.
Economies of Scale: Buying in Bulk Discounts
Here’s another example: your investment property needs lighting fixtures. For this example, we’ll use the exact same fixtures from the same company to compare.
- In a single-family home, you buy a single set of fixtures for $200.
- In a 200 unit apartment multifamily building, you buy 200 sets for $150 each.
How did you pull that off? You leveraged your economy of scale. Many companies will offer discounts when you buy in bulk, so you can buy necessities at a cheaper individual price.
Economies of Scale: Management and Marketing
Property management and marketing are where the benefit of economies of scale really shines.
- For 200 individual single-family homes spread out geographically, you would need 200 different teams of maintenance technicians, and 200 different marketing campaigns to advertise the properties.
- For a 200-room apartment multifamily building, you need a single team of maintenance technicians, and a single marketing campaign to advertise the property.
If you bought single-family homes across a major metropolitan area, can you imagine seeking out and maintaining the vendor relationships of 200 different teams of maintenance technicians? It sounds like so much work. Having a single team on your side that handles the same number of units in a multifamily apartment building is much less of a headache. Plus, you still receive income from 200 tenants.
Utilizing the economy of scale also improves the quality of life of your tenants. Having a large multifamily apartment building gives you enough income to afford on-site staff, who are then on-hand to promptly address any tenant issues or maintenance requests. You can’t really have an on-site management team living beside a single-family home, can you?
Economies of Scale: The Value of Multifamily Properties
We know from the forced appreciation explanation that the value of a multifamily property comes from the net operating income. As the expenses decrease and revenue increases, the net operating income also increases. The examples above of utilizing economies of scale in multifamily apartment buildings all contribute to the decrease of expenses.
The larger a property, the bigger the opportunity for increased revenue thanks to multiple units you collect rent from. If one unit is unoccupied, you have the rest bringing in positive cash flow. If you invest in a single-family home that’s unoccupied, the value you’re receiving (and your cash flow) is negative.
Economies of Scale and Your Time
The most valuable asset you have, even more than your money, is your time. And the time it takes to find, do due diligence, and acquire a several single family homes is about the same amount of time it would take to acquire a 140-unit apartment building, or a 340-unit one. Remember: the one serves the many. In this case, your time serves the increasing value of an investment.
For more details on multifamily advantages, look out for my next blog posts in this series of ten advantages of passively investing in multifamily syndications.
ARE YOU READY FOR FINANCIAL FREEDOM?
We help you create passive income & ongoing cash flow so you can live life on your own terms.
Delphine Nguyen, Investor
Delphine Nguyen is a real estate investor and a licensed real estate broker in Illinois. She learned to be successful from a variety teachers, including her own mistakes. Real estate investing is her passion. Helping others to achieve their goals is another passion that she has. She does what she knows best, therefore, her focus is solely on multifamily and co-living investment types.
Co-living spaces have a higher revenue per unit than traditional one unit per family/tenant rentals.
When people ask me, “are there safety concerns with a shared room near me?”