Why we Love Multifamily (2/26/23)
In the inaugural 15‑minute "15 at 5" episode, Jake Burhans and Isaiah introduce their quick‑fire format and dive into the fundamentals of multifamily real estate. They define multifamily as any property with two or more units, explain the spectrum from small (2‑4 unit) to large (20+ unit) assets, and contrast valuation approaches: comparables for residential‑type units versus income‑based cap‑rate analysis for larger properties. The conversation highlights why multifamily is attractive for new investors, especially through house‑hacking—living in one unit while renting the others to cover the mortgage and build equity. They discuss practical benefits such as risk mitigation (multiple tenants), reduced capital‑expenditure overhead, and the ability to boost net operating income (NOI) via rent increases, ancillary fees (laundry, pets, utilities), and expense management. Market insights focus on the scarcity of off‑market deals in New Hampshire and the importance of relationship‑building to source larger assets. Finally, they outline portfolio scaling tiers (2‑4, 5‑20, 20‑100, 100+ units) and express a shared goal of niching down on multifamily to become experts.
Chapters
works. I think we're good.
Nice.
Hello, welcome. Yeah, we're good. Welcome, first episode of 15 at 5. Super excited. Kickback. Yep, now we're good. Welcome, 15 at 5, first episode. This is something I've been wanting to do for a while. Um, it's just a quick live, 15 minutes every Monday at 5. You know, a lot of people don't want to sit through an hour of whatever, so it's just a quick 15 minutes. The, um, the thought process behind this was just for Isaiah and I to hit record on some conversations that we normally have, um, just as business partners. Um, just either whether it's about life or health or things that we like. Um, for this episode, just gonna be multifamily because that's what we love, and I think it's an easy one to kick it off with. Um, so yeah, I appreciate you being here, Isaiah.
Yeah, of course. Yeah, I think it's a great idea what you're doing right now.
All right. Yeah, so nice. Um, so we're gonna jump right in. So what is, what is multifamily real estate? Give them, give, give some of the people an idea of what it is who may not know, uh, real estate or who are, may not be familiar.
Yeah, so I would say multifamily real estate is apartments. So a lot of college kids and stuff, they're in apartments. So it's not dorms, it's not like student housing. It could be considered student housing, but kind of a good idea of what multifamily is in my eyes is basically apartments. There's a duplex, triplex, those are the smaller multifamilies, 4 units, 5 units, and on. And it's basically just apartments. And the difference between a condo and a multifamily property is that a condo is where you own a section of the apartment. So, for example, a duplex, it would be called condex if you own a section of it. And for duplex is where you're renting out a portion of the property. So, I would just say it's apartments just to keep it simple though.
Yeah, I'd say apartments. So, single family is just your traditional house that you'd buy as a homeowner. Multifamily, I think, is just anything 2 units or above. So, it could be 2 units up to 100 units. And those buildings come in all shapes and sizes. You get a duplex, which is only 2 units, a triplex, which is 3 units, you could be getting 5-unit buildings, any number. There's that number in one building. So typically people like to own more units in one building because it's just less upkeep. So you'd rather, in ideal world, own 100 units under one roof versus, um, 50 duplexes, right? Because it just makes sense that it's, it's less work. Um, but that is perfect. I'm actually going to set a timer, I think like 3 minutes, to see. I'm trying to figure out the formats. Like, we're asking a few questions here. Maybe it's better just to do 3 questions, or, um, or it could just be 1 question and keep going. Yeah, 1 question. Maybe it's just 1 question and we talk about it, and then, um, there's like time for questions at the end. So maybe that's what we'll do. We'll hit on these things, we'll just kind of talk about these and see if there's any questions, um, at the end. But so, yeah, so as you're saying, large multi versus small multi, I mean, what, what do you think is better, um, and at what stage is each applicable. Is it good to start out in small multifamily to get experience and to kind of get some of that under your belt, or is it just better to jump into large multifamily?
Yeah. So I guess I'll first explain the difference between small multi and big multi. So small multi, so the single families, and then there's small multi, which is the duplex to 4 units, because they're valued differently compared to 5 units or more. Basically, the difference in value is the 2-unit to 4-unit is valued on the condition, basically, like comps, which is kind of a fancy word of saying comparables. For example, if a single-family or a 3-unit sells for $500,000 on Main Street, and another 3-unit, exact same floor plan, same unit, 3-unit sells for, I don't know, $550,000, then it's just a good idea of what those properties would sell for. So basically, 2 to 4 units are valued based off of the condition and similar properties that have sold. Compared to 5 units or more, they're valued on the income that the property generates, which is a pretty cool paradigm that I think both me and you had. Where you can just increase the income, basically increase the rent, which also increases the amount of money you make every month, which also increases the value of the property. Uh, so Jake, I don't know if you want to dive a little bit more into that because like if you have questions, I can just kind of keep going on that.
Yeah, so I think it's like small versus large multifamily too because I think that's a good point, like the distinction between residential and commercial multifamily, right? Because residential is 1 through 4 units, that's valued based on comparables, right? So if 123 Main Street's a 3-unit and it has all 2 bedrooms, it's going to compare to another, um, 3-unit that sells on Main Street that has 3 units, right? Um, so it's different than the, the income approach of, um, 5+ units. But I think another sector of that is like small multifamily could be like 2 to like 20 units almost, you know what I mean? And then 20 to like 50 is like mid-range, then 50 up is large multifamily. What are your thoughts on that?
Yeah. I would say it really depends on the investor who you ask, but I think for us and the people that we've been talking to, it's 2 to 10 units. So, 2 to 4 is people that are house hacking. We can get into that later, what that term means. But those are the smaller people, people that are getting started. And then, 5 to 10 units, 5 to 20 units is the You're really building up your portfolio and consider the mom-and-pop owner in that case. And then I'd say 20 units or more when you start buying those buildings, 20 to 100. Those are very competitive. They're very competitive. There's not too many of those. And then 100 units or more is just like you're a whale. You're owning a bunch of property at that point.
Yeah. That's the goal. It's interesting. With, uh, in New Hampshire, right? Because as we're trying to find these, find these deals off-market, it's like anything above 20 units, it's— there's not a lot of inventory. So it's really about like staying in front of these people, building the relationships, like even trying to— like you're doing, um, in a couple days meeting with that guy. It's really just trying to talk to these people because I mean, there's a lot of people going after these properties and there's not a lot of inventory up here. It's not like Jacksonville or Phoenix or Atlanta where you got a million properties within a mile. It's pretty limited.
Exactly, yeah. And so to answer your question, one of your questions was, "What do you think is the most hot right now?" And I think the reason why multifamily is so big right now is because— so if you have a choice, you could buy single-family where I guess it really matters what you're going for, but I guess to bring it back is you have the choice of renting or you could buy a house or apartment building. It's usually a multifamily that would be best case for this. And then basically pay your rent, but your rent would be the mortgage. So the big idea, I guess, in house hacking is people are going out there and buying a duplex, 3-unit, or 4-unit because there's a lot of loan programs for that type of property where you don't have to put too much money down. It's called owner-occupying, or owner-occupying the property, and it's usually an FHA loan that you would use. But you don't have to put much of a down payment into the property, which enables you to live in one unit and then you rent out the other units. And ideally you're not paying any money at all, if not breaking even or making money on the back end. Or say you are losing or you're paying $300 a month, it's better than renting. And you have a house that you're building equity in. Ideally the property's going up in value and you get the depreciation with it, all the tax benefits. And you can also potentially leverage the money that you have into the deal. So there's a lot of benefits with, I think, house hacking, that term nowadays, just that, yeah, that whole concept in itself. And multifamily really enables that as a great potential avenue to do it. And you could do it single family, but another reason for multifamily as well is, say you have 3 single family, or you say you have 1 single family property, you have 1 tenant. If that tenant leaves, then you lost 100% of your income. But if you have a triplex and 1 tenant leaves, you still have 2 people paying your rent, or 1 person pay your rent if you're living in the property. So that just inherently mitigates your risk if you buy a multi.
100%. Yeah. I think that's 2 big things. One is, right, if you have multiple tenants and one leaves, it's not a big deal. I think another thing is all the capital expenditures, capital expenditures being roofs, furnaces, doing the siding, all of that. If you could have 10 units under one roof, it's less maintenance overall. Because if you have 10 houses, you have 10 roofs, you have 10 furnaces, you have 10 hot water heaters, you have 10 sewers and wells and all this stuff to deal with. But if it's all under one, all that capital expense stuff is, is all condensed, and it's only doing like the, uh, unit turns, like fixing up the kitchens, the bathrooms, stuff like that, um, when people get out. Uh, but house hacking is great. So to put that in an example, it's like, you know, you have a duplex, right? You live in one unit, say you can rent it out. Say it's a— there are two 3-bedroom units, right? You could rent out one for $1,500 and say your mortgage is $1,200, right? So the entire mortgage that you're paying the bank is covered by the other person renting or the other two people renting, right? So in that case, you'd have a little bit of cash flow. We had some note on that as well, right? So you have your rents, Then you have the mortgage, but there's also other expenses in there, right? You got to pay for utilities. You got to have a little bit of a war chest, which is like your reserves. There's a couple of things besides the mortgage that you need to account for, but it's definitely a great move to get started. I feel like when we first got into real estate 3, 4 years ago, I know you're a little longer, like 5 years, but the first things I ever learned was house hacking from Brandon Turner. Now I feel like it's blown up so much more. It's so much more popular. Everyone's trying to house hack.
Yeah. And going off that too, you could technically do it with single families too. You could just basically live in one room and rent out the other rooms if it's a 3-bedroom house. But there's a lot more— I don't know, your comfortability of living is a lot— because you live in the same, literally the same area as them. So that's another reason why multifamily is more attractive. Because you could do it with a single family, but it's basically more ideal to do it with a duplex, triplex, or 4-unit.
You could do it with an ADU too. An ADU for a single.
True. True.
Those are more popular out west, I think, even in California and stuff. You'll see a lot of ADUs, which is like accessory dwelling unit. It's like you have your main house, and then you have maybe a little guest house in the back that you can rent out. Or it's the same thing with an in-law, right? Maybe you have an in-law. In-law is actually a good medium between multifamily and single, because you're not renting it out by the room. It's like a separate spot, you know?
Yeah, it's like in-law and ADU, are they the same thing, or what would you say?
Yeah, they might be the same thing. I always just thought in-law was like it's in the house. It probably is the same thing. I thought in-law was like it's like in the house attached, and ADU is like a separate building, but I could be wrong. Real quick, before we get off here, scaling, I guess real quick, our favorite aspects of multifamily. What's your favorite part of multifamily, would you say? Or one of them you could—
Yeah, I feel like we touched upon a few of them, but I think the biggest one is the creating value, how you can just increase rents. Because the equation is, and just, it might confuse a few people, but net operating income divided by cap rate equals the value of the property. And net operating income, if you can increase the rent, which increases that numerator, NOI, which makes it the bigger number, you basically increase the value of the property that much more. So it's cool because you're kind of killing two birds with one stone when you do that, because you get more, potentially more cash flow, and you also raise the value of the property. So I think that's the biggest thing I like about multifamily. What about you?
Yeah, I'd say that's what's great about the commercial is the NOI, right? It's all about increasing the NOI. So the cap rate's like a percent, say it's 7%, A town has like a given cap rate depending on how nice it is, right? So, um, say a town has like Somersworth, it's like a 7% cap rate. All you have to do is increase the NOI. So you can either increase the rent or you can cut expenses. But in the properties we come across, you're really— you're never cutting expenses because all these people, these mom-and-pops, are operating at like 20-25% expense ratio, which we underwrite at 40%. So you're always increasing the expenses. So it's usually the rents that have to go up. In order to get that bottom line, that NOI up. Um, but I think multifamily too is just the scalability. I just think it's the best thing in real estate, at least in residential real estate. Um, it's just, it's leaps and bounds better over single family. So I think we're trying to niche down on that, not get shiny object syndrome, and really just be experts in, in multifamily. That's the goal.
And another thing off of that too is like another way you can increase income, like another reason why I like it is like So the property is a 5-unit, has to be 5-unit or more for this to apply. But you can add like a laundry facility in the area, or like laundry machines, or you can make the tenants pay their utilities. Basically, doing all this increases the income in the end, which also just makes the value go up that much more. Because you can also be charging for pets, right? You can charge $50 a thing per tenant, which also increased the value of the property, which is such a baffling idea when I first heard of it.
Yeah. There's a lot of things to do. And that's another video, is to get into your experience. Because Isaiah's underwrote a lot of large multifamilies for a couple investors that we've worked with. So 300, 400-unit buildings. That's a whole other animal when it comes to multifamily from anything 50 units or under. But Just interesting. So we're approaching the 15-minute mark. We're gonna have to save scaling fast and paying off debt for another video because we like to run a tight ship here. So 15 minutes, we're at the mark. 15 at 5. Appreciate y'all. We'll see you next week, Monday at 5 PM.
Peace.
