While owning a single-family investment property can be a great source of income for many, especially those who are just getting started in real estate, it certainly has its limitations as well. Multifamily properties tend to provide more diversification and a wider income stream than single-family properties, making it completely understandable that, as a single-family investor, you may be considering a multi-family conversion. In this article, we’ll discuss the pros and cons of going this route and will provide alternative options that can help investors benefit from recurring monthly income while avoiding the hassle of going the multifamily conversion route.
Is a Single-Family to Multifamily Conversion Worth It?
The short answer is typical, yes, but there are some caveats to going this route. When managed properly, the higher the number of units you own, the higher your income will be. In most instances, this increase in rental income will increase your property’s value, making it worth more should you choose to sell down the line. If the single-family home you plan to convert into a multifamily property is in need of a remodel and the numbers prove the project to be worthwhile, it may be an ideal time to convert the space. With that being said, there are several downsides to going this route that many don’t consider, including the following:
1. Local Zoning and Building Regulations
Before beginning the process of knocking down walls, it is important to know if you are legally allowed to do a multi-family conversion. Most cities and neighborhoods heavily regulate building changes to ensure population density does not negatively impact the area. Zoning restrictions are in place to ensure sewage systems do not become overrun, neighborhood amenities aren’t overcrowded, public parking remains accessible, and various other factors. As a result, it is imperative that you receive full zoning approval and apply for the proper permits prior to beginning the conversion process. If you're interested in rezoning in a particular city or neighborhood, call the local zoning office and ask if you are permitted to do a multifamily conversion, the permit applications that are needed, and the fees that are involved.
2. The Cost of Being a Landlord
Those who choose to become investors often do so to generate passive income. When units are filled with trustworthy tenants who make their payments on time, there is indeed a steady stream of cash flow, but that comes at a cost. For starters, owning property in any form – single-family, multifamily, or any other type of real estate – is anything but passive income. Those who choose to become landlords are starting a small business, and a business demands time, effort, and energy. Even with a property manager in place, which can be a costly expense, landlords must constantly make decisions regarding bookkeeping, repairs, and maintenance as well as ensure their units are filled and do not have extended vacancies. This involves working with real estate agents to properly market the units and price them competitively with the market. Many investors find that they spend more time in their role as a landlord than they spent at former demanding jobs they had in the past. Being a landlord is a 24/7 business, and going this route means you must constantly be available to answer tenant’s phone calls and emails – including when they’re locked out of their apartment at 4’oclock in the morning.
3. A Multifamily Conversion Can Be Extremely Expensive
Depending on the level of work needed, a multifamily conversion can cost $50,000 per unit or more. In addition to the cost of the renovation itself, which must be up to code and at a certain standard to attract high-level renters, additional fees will need to be paid for rezoning, permitting costs, additional utility meters, and various other fees. If zoning restrictions will not be an issue, spend considerable time crunching the numbers to ensure the income from tenants will outweigh the cost of the renovation.
4. A Multifamily Conversion Can Be Time Consuming
A multifamily conversion can take several months, or several years, depending on the level of the conversion. Conversion projects are also often met with many setbacks and delays, which can further prolong the time until tenants can be in place. When crunching the numbers, ensure you can afford to take the time to go without income on the property during the project and be sure to pad extra time in the event that the conversion takes longer than anticipated.
An Alternative to Going the Multifamily Conversion Route:
Multifamily Syndication is a great way to partner with individuals who manage real estate professionally. If you are an accredited or sophisticated investor, syndication involves pooling funds into an investment property (or portfolio of properties) and receiving monthly income when the tenants pay rent each month. Here at Mentis Capital Partners, all properties that are included as syndication investment options on our website have onsite property managers, ensuring that the investment properties are well maintained and tenants are happy. Multifamily syndication eliminates the need to manage individual tenants and properties, and the deal sponsor takes care of researching income-producing properties to purchase and property managers take care of maintenance and repairs.
Final Thoughts
We at Mentis Capital Partners always invest alongside our tenants, proving our dedication to finding high-level income-producing properties that will yield long-term returns. We have a dedicated team of research analysts who are responsible for vetting every potential property we invest in ahead of time to ensure it will provide steady, recurring cash flow and will withstand market conditions. As with any real estate investment, multifamily syndication is a long-term play and often requires leaving your money in the investment for a minimum period of time, such as five or ten years. The longer you keep your funds in the investment, the higher your returns will be – you have to be willing to be in it for the long haul. If you have questions regarding multifamily syndication or want to learn more about the process, we would be happy to connect with you.