3 Reasons Why I believe MF is a Great Vehicle to Financial Freedom

Everyone is looking for a bigger better way to achieve the all elusive term, “Financial freedom.” It’s the phrase that has us getting up day in and day out to finally at the end of it say, “We did it. We achieved financial freedom and now we can do whatever we want, however we want, with whomever we want!” Like many, I have been looking for a quicker transition or the ‘Golden ticket’ as many often say. After following the recent craze to flip homes, I’m realizing that the game called Monopoly may have gotten it right all along. In my quest for achieving financial freedom, I realized I would have to own a lot of single family residences, commonly referred to as SFRs, to replace our monthly income. After rehabbing rentals and flipping homes, I realized very quickly that instead of achieving financial freedom, I had instead created a J-O-B. It didn’t take me long to figure out that owning a building with more than one door was probably a better option. I’ll let you judge for yourself…

1. More Economic Stability

When there is a contraction in the economy which is approximately every five to ten years, it leaves many individuals without a job or a cut in wages forcing people to consider moving back home or sharing a space. When you are the owner of a SFR, you can lose your entire cash flow on just one property overnight. In an economic downturn, that can leave you covering more than just the note on the property but causing you to reach into your own pocket to cover the mortgage plus the utilities, real estate taxes, insurance, and rental licenses. If you own your property outright, you may be able to weather the downturn, but it certainly isn’t an ideal situation. I know when the next downturn happens, I will be crossing my fingers that none of my SFR tenants is impacted and forced to leave my homes.

2.  Better Economies of Scale

Granted, it does take more cash or equity at the onset to purchase a multi-family (MF) building, but in the event of a market downturn, if you lose a resident or two, you still have the remaining doors to cover the loan, as well as, the expenses on the building. From a clerical standpoint, when dealing with a multi-family building, you only have to handle ONE insurance bill and ONE real estate bill for all of the doors in a multi-family complex. Conversely, if you owned ten SFR properties, you would have ten insurance contracts, ten real estate bills, and ten separate rental licenses. That is what I call clerical intensive or a BIG FAT headache! From a maintenance vantage point on a MF, if you have ten items that need your attention from ten different tenants, you are only sending your maintenance man to one location rather than driving to ten different addresses. Again, being billed for only one property, cutting one check, etc. This is True Economies of Scale which equals “Getting Your Life Back!” I look forward to putting this into practice after trying to manage different roofs all over the city.

3. More Cash Flow

This is my personal favorite! There is more cash flow coming in per month because there are more doors un3. More Cash Flowder one roof. Again, in the event of an economic downturn, you will still be able to make your mortgage payment because there is more rent coming in per rooftop. On average, the higher the economic clientele base the less likely you will experience an increase in vacancy. Your Debt Service Cover Ratio, known as DSCR, is a formula created to ensure your net operating income can cover your debt obligations to your lender for the year. Lenders like to ensure that you are operating at 1.25 or greater ratio or the bank may call you and ask for you to put more money down to keep your loan healthy and at an appropriate ratio. In this tight market and the looming of a market correction, I am running numbers for the Debt Coverage Ratio closer to 1.5 so that in case there is some unforeseen job loss and an increase in vacancy, I’m still able to cover the note on the building and not have to go calling upon my investors and ask for more money. For more information on calculating the Debt Service Ratio, go to http://financeformulas.net/Debt-Coverage-Ratio.html

Obviously, what real estate vehicle you choose to invest in is a personal decision. You may actually prefer flipping homes, but if your ultimate goal is to escape the rat race or at least create another income stream, I hope you can see that multi-family is worth considering. The best part is there are many syndicators out there looking for deals in this space, so you don’t have to become the expert to earn the benefits of this particular income stream. Happy investing!