Diversifying a real estate portfolio is a necessary move for many reasons. It spreads risk across many different investment types, for example. It also gives investors an opportunity to scale their portfolios. Investing in the same asset class and only that asset class can lead to stagnation.
Increase profitability and grow a scalable portfolio by doing something different.
Here’s an example. Investors who have only bought single-family homes can make an immediate adjustment and scale their investment portfolios by turning to multifamily properties. Buying duplexes, triplexes, and even small apartment buildings can inject additional revenue streams into an investment portfolio, creating new opportunities for growth.
Not sure where to find the best multifamily properties? Contact us at Bell Properties and we can help you navigate the market. We can also talk about our expertise when it comes to California property management.
Here are some strategies that are sure to help.
Benefits of Investing in Multifamily Properties
Multifamily properties present unique advantages for investors looking to scale a portfolio and experience new ways to earn income and increase value.
Here are a few key reasons why multifamily investment properties can be a smart move:
Higher Cash Flow. With multiple units under one roof, investors can significantly increase their rental income on a monthly basis in the short term and also over time. Even if one unit is unoccupied, others can cover expenses, reducing overall risk. Renting out a single-family home means losing an entire income stream when the property is vacant or the tenant isn’t paying rent. A multifamily investment property allows for less risk, thanks to the multiple sources of income throughout the building.
Economies of Scale. Owning and managing multifamily properties is more cost-efficient compared to owning multiple single-family homes spread across different locations. Expenses such as property management, maintenance, and repairs are consolidated. There’s less spent on a per-unit basis on everything from landscaping to pest control to HVAC inspections. Budgeting is more streamlined and expenses are often more predictable, especially if an investor can leverage property management technology provided by a partner such as Bell Properties. Contact us to learn more about how to save money on routine, preventative, and even emergency maintenance issues in multi-family homes.
Easier Access to Financing. Lenders often view multifamily properties as less risky because of their income-generating potential. This can give investors access to better financing terms and more options. It’s easier to build a larger portfolio when there’s more equity and leverage to work with.
Appreciation Potential. Single-family homes are celebrated for their ability to grow in value, but in the California real estate market, multifamily markets are also likely to appreciate in value. That’s because the market for this property type is often driven by income rather than comparable sales, which means that increasing rents and reducing expenses can directly impact property values.
Offering tenants a well-maintained unit in a multifamily property comes with a number of benefits, and investors willing to explore this type of investment as part of their scalability and portfolio diversification process stand to increase earnings in the short and long terms.
Strategies to Successfully Transition to Multifamily Investments
There’s no need to sell off the single-family investment homes in order to invest in multifamily properties. The idea is to create a scalable, diverse portfolio of real estate assets. Keep the single-family homes that are already doing well. If an investor has homes that are not performing as expected, a 1031 exchange may be one way to trade in those properties for multifamily investments with more potential. We’ll talk about that after discussing how to approach the multifamily market as an investor who has predominately purchased single-family homes. We can help with this, so contact us at Bell Properties before making any moves.
Evaluate Existing Financial Positions
Investors should begin by taking a hard look at current resources. How much capital can be deployed towards new acquisitions? Is it possible to work with partners or seek additional funding? Multifamily investments often require significant upfront costs but offer excellent returns in the long term.
Research Your Market
It’s easy enough to start small by targeting specific areas and demographics where multifamily demand is high. Look for growing job markets around California, affordable housing shortages, or areas with high rental demand. Understanding neighborhood trends can ensure an investment property remains attractive to tenants.
Build a Network of Professionals
Networking with industry experts who can guide an investor through the multifamily transition process is a good way to succeed. Investors new to this market will want to collaborate with brokers, real estate attorneys, accountants, and property managers like the experts at Bell Properties, who specialize in multifamily investments. There are books that can be read and podcasts that can be listened to. Read blogs. Join our community of new owners at Bell Properties.
Don’t hesitate to attend networking events or join investor groups to learn from those who’ve already scaled their investments. Many investors have found success by listening to experienced multifamily investors.
Start with Smaller Multifamily Properties
New investors who are scaling their portfolios do not need to buy a sprawling 2,000-unit complex. That’s going to be difficult and chaotic. It’s better to start with smaller multifamily units like duplexes or triplexes. These are less intimidating, easier to finance, and provide valuable experience. Once an investor is comfortable with multifamily investments, scaling to larger properties becomes more seamless.
Understand Valuation and Financing
Unlike single-family homes, multifamily properties are valued based on their income potential. Investors who are not already familiar with Net Operating Income (NOI), Cap Rates, and other key metrics will want to do some studying.
Create a Scalable Management Plan
Having multiple tenants means handling repairs, complaints, and turnover at a higher volume. Smart investors will understand the importance of California property management, even if they’ve been managing a single-family home on their own. Contact us at Bell Properties to find out how we can make the transition smoother.
Using the 1031 Exchange to Acquire Multifamily California Investments
Investors can consider refinancing or selling some single-family properties to free up equity for a multifamily purchase. One of the best ways to do this, at least from a tax standpoint, is by utilizing the 1031 exchange.
Executing a successful 1031 Exchange to transition from single-family properties to multifamily investments requires careful planning. Here are the key steps to manage the process:
1. Understand the Eligibility Requirements
To qualify for a 1031 Exchange, both properties must be used for investment or business purposes. The properties must be considered "like-kind," but this doesn't mean they must be identical in type—trading single-family rentals for a multifamily apartment building is acceptable. The exchange must meet strict deadlines and compliance rules (more on this below).
2. Sell Your Single-Family Property
Once an investor has identified a single-family property to sell, it’s important to work with a qualified intermediary (QI) who will handle the sale proceeds. Directly receiving the funds will disqualify a transaction from being a valid 1031 Exchange.
3. Identify Replacement Property
Within 45 days of selling a single-family property, investors are required to identify up to three possible replacement properties. Alternatively, if more than three properties are potentially good investments, the total value of those replacements must not exceed 200% of the sold property’s value.
4. Close on the Replacement Property
An investor has 180 days from the sale of the relinquished single-family property to close on the purchase of a new multifamily asset. Ensure that deadlines align, and that the QI is doing their part to maintain compliance.
5. Maximize Tax Deferral
To fully defer capital gains taxes, it’s time to reinvest all profits from the sale into the replacement property. This can be a great opportunity to diversify into larger, higher-yield properties, so it’s worth strategizing how best to optimize your investment. Talk to us at Bell Properties, and we can make sure nothing is being left on the table.
The 1031 Exchange is a powerful tool, but it comes with challenges:
Strict Deadlines. Missing either the 45-day identification or 180-day closing deadline will disqualify the exchange and lead to tax penalties.
Finding the Right Multifamily Property. The multifamily market can be competitive, so it's vital for investors to begin identifying properties early to avoid being constrained by deadlines.
Complex Rules. The legal and financial nuances of a 1031 Exchange require working closely with experts like qualified intermediaries, CPAs, and a team like ours at Bell Properties to avoid mistakes.
Proper planning and the right guidance can help smart investors work through these challenges and take full advantage of the opportunities provided by the 1031 Exchange.
Creating an investment portfolio that has the potential to scale will allow for steady growth, immediate earnings, and a lot of long-term potential. When it’s time to think about investment goals and where the focus should be on new acquisitions, consider multifamily properties, even if single-family investing has provided a great start.
We can help. Contact us at Bell Properties, and we’ll talk about next steps.
