Why I Switched From Single-Family Rentals to Multifamily

Most people start with single-family rentals.

I did too.

My first deal made about $200/month.

Then I bought a 56-unit apartment complex with my parents as investors, and that deal changed everything.

In this episode, I break down why I switched from single-family to multifamily, including:

• How multifamily properties are valued
• Why cap rates matter
• How raising rents can increase property value
• Why expenses matter so much
• The tax benefits of multifamily
• Why one vacancy does not crush the whole deal
• Why team-based investing can help you scale faster

This is not about saying single-family is wrong.

It is about showing you how the math changes when you move into commercial multifamily.

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https://activedutypassiveincome.com/mma

Most military investors don’t struggle because they lack information.

They struggle because they’re doing it alone.

The Military Multifamily Academy (MMA) is a 14-week program designed to help service members learn commercial real estate by actually working real deals with a team.

No theory.

No guesswork.

Just execution.

If you’re ready to stop watching and start building, learn more here:

activedutypassiveincome.com/mma

Transcript

Speaker 6 0:00

yo, yo, API. This is gonna be a cool episode where I'm gonna actually describe why I switched from single-family to multifamily. Now, I will say there's no right or wrong answer, but I think it would be very interesting for you all to understand some of my thought process, 'cause it might apply to you, especially if you're just starting out. Or maybe you're thinking about doing the switch, and you want to know why the heck somebody would switch from one good strategy to another good strategy, and, uh, let's get, let's get after it. Let's get into it. And if you have any questions, and you're-- maybe you're watching this on YouTube or you're in our community, whatever, post them, and I will absolutely address them. That's my promise to you. All right. Here we go. I have a couple of notes on my phone. I'm gonna check them out as we go, 'cause this was just very impromptu, off the cuff. Here we go. All right. So first is the economics with cap rates. Um, okay, what I mean by that You all know how single-family real estate works. Most of you all know, especially if you're, if you're, if you're new, maybe you don't, but like for the most part, you kind of get the concept. It's, you know, it's worth what people will pay for it, and that's really all there is to it. Basically, you look at a bunch of houses around, and if th- those are kinda similar, that's what your house is probably gonna go for, right? Again, it's not worth anything until somebody's willing to buy it for X amount of price. But the way you can kind of rationalize what the price is, is just comparing it, which is why it's called comparables, within a very small radius and a small timeframe. So, you know, maybe in the last month, maybe within a half-mile radius. Um, but even that kinda depends on like how big your neighborhood is or how diverse your neighborhood is or, or you know, how quickly the market is going and all that kind of stuff. So there's a lot to take into account actually. I'm not saying it's super easy, but we-- After I explain that to you all, even if this is the first time you're hearing it, you kinda get it. Oh, you gotta just have to compare it to other houses. Boom, makes sense. Now... Oh, actually, let me add to that. One of the ways that you can do it if like let's say one house is dang near the same thing, right? But then they're like side by side with each other, but one has 100 square f- feet more than the other one, is a lot of times people do square foot calculations. So you look at a certain house and be like, "Oh look, that house is, um, I don't know, $200 per square foot." Um, and that's what the going rate is for houses. And remember that term going rate 'cause I'm about to get into that with commercial multifamily. The going rate per square foot of similar houses of that style, that type, you know, d- let's say three bedroom, two bath, two stories, blah, blah, blah, is $200 a square foot. Okay, well that means its neighbor that is... if it's exactly the same, just 100 square feet bigger, is probably gonna have the same going rate per square foot, uh, when it comes time to do the appraisal. Okay? So that's, that's the, the long and short of it. Okay. Now, with commercial multifamily, there's a massive shift in how you think about it. And you're gonna see why to some of y'all this is, this is gonna appeal way more. To some of y'all, you're gonna be like, "No thank you." But you're at least gonna understand how this, how and why this could appeal to somebody more, especially to me. Okay. And that is that it does not matter what, like, that you don't look at comparables, okay? You look at how much money the business makes. Because yes, it has real estate, but it's really a business. It's just a business of the real estate variety. And or another way you can think about it is it's a business that comes with real estate, so it's, you know, it's automatically more recession resistant. It's more secure. There's an actual physical investment, um, that comes along with it, right? It's not just like some internet business that if it, you know, if it goes out of business, then, then there's nothing left except for a website and a domain name. There's an actual physical structure, right? And, um- The way it's valued is based off of how much the money business makes, the business makes. Which, uh, so let's, let's go through the math, okay? Let's go through some simple, simple, simple math. All right? There's always a multiple when it comes to businesses. But in order not to complicate it, we're not gonna go through an underwriting class right now live. Um, th-this multiple is technically called a capitalization rate. Um, and the capitalization rate is actually a percentage, right? So it's like 7%, 6%, 10%. Um, and you divide by that. And for all those who have passed grade school math, you know that if there's a fraction that is less than one, if you divide by that number, it actually multiplies, right? And so if you divide by 10%, it's like multiplying by 10 because 10% goes 10 times into 100. That's all I'm gonna say. I'm not trying to give everybody a math class. Um, but for ex-- another example is if you, if the capitalization rate is 5%, the multiple is 20 because 5% goes into 100% 20 times. Now, so what you need to do is you need to find out how much money this thing makes, not counting any debt because, you know, interest rates change and everybody can... There's different types of loans. So what you have to do is just look at the raw business. How much money does this thing make? And then what are the expenses to just run the dang thing? So okay, let's say there's 50 units and you're, um, and, and, and, you know, you're charging like, I don't know, $1,000, you know, on the rents and then, uh, all your expenses are about $800 per unit, right? Or let's just say $900 per unit to make the math very easy. That means that in any given month, you have 50 units making you $100 each. That means you're making about $5,000 every single month, NOI, which stands for net operating income, right? So again, let's say there's 50 units. Each unit is making you $1,000 a month, and each unit is costing you $900 a month. Now, spoiler alert, that's actually not a great deal 'cause we're not even including the loan payment yet. But just for the sake of the argument, to make the numbers easy, right? So you look at how much that property makes, and you multiply it by 12. You know, in this case, 5,000 times 12 is $60,000. And then you divide it by that cap rate. But again, because I think it's easier to think of it as a multiple, let's say the cap rate's about 7.5%. That's equivalent to multiplying it by about, I don't know, 15 times, right? So you look at 60,000, you multiply that by 15, that's the same as 90,000, I believe. No, sorry, 60,000, that's 900,000. There you go. I forgot a zero. So that property's worth almost a million bucks. And just to make sure I'm not crazy, if you guys are listening at home, and you're like, "Yo, your math is wrong," I wanna make sure I'm not crazy, so I'm gonna do this live. All right? So $5,000 Right? Times 12, that's $60,000 in a year. Net operating income, right? This is before debt service or like paying your loans, right? Um, divided by .075 or I'm just gonna do it easy, I'm gonna say multiplied by 15, right? Yeah, $900,000. So just shy of a million bucks, and that's a $900,000 property. And that is, that is how the math works. Now let's, let's, let's think of something crazy. Let's say you raise the rents by just $50. So now all the rents are 1,050 times 50, right? So now, um, yeah. And then you subtract, uh, sorry. So now it's a hund-- So basically 1,050 minus 900. Right now, each one of those 50 units is netting you in your NOI, your net operating income, $150 instead of just $100. Pretty simple math, right? So 150, let's do that math. 150 times 50 units, right? That's 7,500 instead of just 5,000, right? That's a 50% bump. That's assuming there's no... that the expenses stay the same. That's assuming we just like renew everybody that just a mere $50 more, right? And now we multiply that by 12, right? So that's 90,000 instead of 60,000. And now we multiply that by 15 because there's that multiple, right? And again, if you don't remember why I'm multiplying it by 12 first, it's 'cause I have to annualize it. I have to... There's 12 months in a year, so you have to multiply it by 12 first 'cause you have to account for the entire year. And if I missed that, I apologize, but that's where the first multiple comes from, 12. And then you mul- do the actual multiple, in this case, 15. So that equals 1.35 million. So check this out. You own this property, and what you just did is you increased the rents. Maybe, you know, in, in the span of like a month or two, you've realized all, all the people are renewing. That's not how it's gonna work out. It's probably gonna be sprinkled out throughout the year. But just for the sake of the argument, let's say within a month or two, you, you renew all everybody's leases, and everybody's leases go up 50 bucks. Instead of 1,000, it's 1,050 now. And the expenses are exactly the same, 900 bucks each. Nothing has massively has changed. Again, this is not a really great deal because the loan's probably pretty expensive. You're probably gonna be in the hole cash flow-wise, but I'm just trying to do some easy math. With that increase of a mere 50 bucks, right, across all 50 units, you increase the value from 900,000 to 1.35 million. That is a $450,000 increase. For the people in the back, you just increased the value of this business, of the real estate variety, right, an apartment complex, by almost half a million bucks by doing one thing, raising the rents 50 bucks. 50 bucks rent raise equals almost half a million dollars in this dang example, and that is the power of commercial multifamily real estate or apartment complexes, okay? If it's five units or more, this is how it's valued, right? You're not gonna be comparing it to your neighbor. You can have two of these side by side, and one could be worth 5 million, the other one could be worth 10 million because it all depends on how much money the thing makes. And that's what I love about it because all of a sudden I'm not beholden to the market. I'm not beholden to what John and Jane over there, you know, are paying for their properties. I'm not gonna be compared to what they did. I'm gonna be compared to how well I'm running my business, and I love having that control. So It's kind of magical, right? The math, how it works out that way. Uh, because as long as whatever revenue you increase, as long as most of that trickles down to your bottom line, you're exploding the value. Now, if you're thinking about this and you're like, "Wait a second, does that mean I could just lower the expenses?" Ding, ding, ding, ding. You're right. You can literally... What if you were able to lower your expenses? Maybe you renegotiated a garbage contract. This happened to us, and we increased the value of the property by $60,000. Boom. Or you, I don't know, you, you get a better insurance policy. All of a sudden your insurance is cheaper. There's a million different things you can do. Maybe, maybe you have a better maintenance situation. You know, you get maintenance done quicker and more efficiently and less costly. All of a sudden, you're now able to redo your numbers. You look at your numbers historically and what it's gonna be in the future, and you're like, "Wait, all of a sudden my expenses aren't $900 per unit. Maybe it's only 800." Imagine the value add there, right? That's a $100 increase per unit to your bottom line, not just $50. And that's what a lot of operators love doing. They like looking at the numbers and seeing what can they decrease as far as expenses and what can they increase as far as revenue, and then they know that that'll massively explode the value. All right, so let's check it out. What are some other things I wrote down? Um, okay, not beholden to the market as much. So I kind of already mentioned this, right? I, uh, you- you're not beholden to what, like, John and Jane pay for on their house. You're not gonna be compared to their decisions and their purchases. Uh, but you are still beholden to the market in a different way. And that's for what I was referring to earlier with what is the going rate, right? The capitalization rate. That is actually similar to a comparable. So with single-family homes, like residential real estate, where homes are compared that are, you know, similar, um, and the going rate for those homes is based off of, like, sometimes, you know, most- more than anything is the square footage, right? What is the square, uh, what is the price per square foot, right? That is a rate. Uh, you know, how many dollars per square foot. Well, in this case, it's how much is it valued per the amount of dollar bills it brings in, in your net operating income. So how much are we willing to pay for something relative to how much money it generates as a business, okay? That's what we were doing in the earlier calculation. Well, that rate, you know, the appetite of investors to pay for these businesses relative to how much money they make, that does fluctuate a little bit. So, um, when I bought our 56-unit apartment complex just outside of Indianapolis, Indiana Back then, it felt like we overpaid for it. Um, and actually, I'm gonna save that for later. Back then, we paid... I think the going cap rate was, it was about between eight and nine percent, okay? So, um, I don't know what that is. It's like maybe a 12X multiple on its net operating income. Well, since then, real estate has become much more popular as an asset class, uh, specifically apartment complexes, because affordable housing has become an issue. Housing in general has become an issue. That's why co-living is so popular. Basically having roommates even when we're adults, right? That is becoming more and more popular because housing is expensive, because inflation and life is expensive, period. And so you try to optimize on life's biggest expense, which is living in t- uh, your housing and taxes, right? So what happened is the c- competition for investors to own these large apartment complexes got a lot more aggressive, and so the capitalization rate went down, which remember, that means that the multiple at which these are valued went up And so I think the cap rate right now, the capitalization rate for my property, instead of being between 8 and 9%, it's under 7%. So let's take a look. Let's, let's do the math 'cause this is gonna blow y'all's mind. Let's say the capitalization rate is 8.5%, okay? So I'll say 100 divided by 8.5. That is almost a 12X multiple. So whatever your net operating income is, you would multiply it by 11.7, 11.7, let's say almost 12, to find out what the value of the property is. Now, if the capitalization rate is 6.5, let's say 100 divided by 6.5. How much does 6.5% go into 100%, right? Um, that's 15.3. So all of a sudden, you went from an 11.7 to a 15.3 multiple. Why is that so crazy? Because let's say your net operating income is $100,000. You know, if you multiply it by 12, right, the value is $1.2 million. Now, if you take 100,000 and you multiply it by 15, that's $1.5 million. So by the competitiveness, the, the, the supply and demand, the, the how attractive these asset classes are for investors, that makes the capitalization rate go down. It pushes that down from 8.5 to 6.5% in this example. Just a 2% decrease has skyrocketed the value of this property. It went from a $1.2 million deal to a $1.5 million deal. Do you see how that works? By the asset class, by apartment complexes in that particular market becoming way more popular with investors, all of a sudden you have to pay more for these based off of how much money they make. And so anyway, hopefully, hopefully that makes sense. Oh, and by the way, I'm just gonna take a pause here. If you're listening to this and you're like, "Holy cow, this is super cool," um, guess what? We do this. Our organization, Active Duty Passive Income, ADPI, we teach this. We've had, gosh, hundreds of people graduate our cohort program where they build teams together, they're able to find deals, they're able to raise money together. And by the end of this simulated three-month event where you're building teams, you're learning about this together, um, you start putting in offers on deals. And I would love to invite you to join that if this is appealing to you, right? And you can-- You don't have to be the numbers person. You can be the, kinda like the sergeant major, the, the, you know, the person who is actually, like, beating the drum and executing the business plan. You can be the person who, who's developing the, the spreadsheets and the business plan. You can be the person that finds the deals and closes it with the team. You can be the person that raises the money from investors. There's many different things you can do depending on your skill set, your personality type, and all that kind of stuff. So there's, it's kinda like a military MOS. There's something for everybody. And if you're interested, you know, just Go to our website, you know, opt in, uh, or click below. There's gonna be a specific link where you can fill out an application, right? And then it'll actually give you a quiz to help you figure out your role, right? That's kinda cool 'cause it'll be like, do this whiz-bang AI thing that'll help you figure out what your role could be. You know, it's not set in stone. You can do whatever you want. And a whole recorded training of me explaining all this in depth. Um, but yeah, so, uh, probably the best thing is not to go to our website. It's just to go directly to the quiz, um, and the application, and that's, you know, just in the comments below, um, or, or in the show notes. Wherever you're watching this, right? YouTube, podcast, whatever, show notes or in the com-- uh, in the description below. Now, what else did I wanna talk about? Just make sure I don't forget. Okay, massive tax breaks. Woo-wee. Guys, um, I don't even know where to begin, but just think about it this way. My parents have barely paid any taxes in I think in like five years because the depreciation that counts against the income they're bringing in from the apartment complex, uh, has been getting wiped out by the depreciation. And what that means, it means... Think about it this way. If you had a business, I, I don't know why this example helps people kind of picture it better. If you had a business and you owned a car with that or you just bought a car with that business, you can probably, you know, realize that that car is gonna like deplete in value, right? It's gonna go down in value. It's going to depreciate in value over like five or 10 years, right? It's gonna just be worth nothing eventually. Um, and I think we just-- It's just so obvious that a car gets run down, right? Well, with real estate, it's not so obvious, especially when you do, uh, maintenance on it and you keep-- you do the upkeep, you do renovations. It might take-- It might never, right, actually lose value. But it still is considered to be depreciating by the IRS over twenty-seven and a half years. So instead of taking a single write-off, you depreciate it. Uh, you take its value minus the land, and you split it up into twenty-seven and a half chunks, and you kind of write that off bit by bit every single year. And typically, when you get into this business, you'll find out, oh, you know, I mean, the amount of cash flow I'm making is more or less what I'm able to depreciate, and so a lot of it's wiped out. Uh, and then sometimes if, if your depreciation's even more, you get to count it against some of your W2 income potentially. And then actually, but that's capped. And then actually, you can count it against almost all or beyond your W2 income if you're what's considered a real estate professional designation, um, or, um, REPS, real estate professional status. There you go. Um, I'm not gonna get into that too much now, but these are insane tax benefits. And so a lot of people are, are-- love real estate for that reason, especially large apartment complexes 'cause those numbers start becoming very, very meaningful. All right, uh, let's keep going. Last but not least, and this is kind of a Grant Cardone-ism, but, uh, you know, it's actually really true. If one tenant leaves or gets evicted, that doesn't change anything. It doesn't change anything. I was just talking to my property manager yesterday. She's like, "Oh yeah, just evicted this one person." And I was like, "Okay, sweet. We have 54 other people," or whatever, right? Like, it does not... It doesn't change the economics. Literally, the way we underwrite, which means, like, we put it on a spreadsheet and we project the future financially, is we anticipate, uh, that there's gonna be fluctuations, so we just go based off of averages. One month it might be one extra person, one month there might be two less people, and then so on and so forth. It kind of just zigzags up and down, sine curve, right? Woo. And it is what it is, and it's okay, and we're okay with it. And, and that's what kind of-- it almost, like, lets you sleep peaceably at night, you know, even though people are coming and going inside of this property. 'Cause if you have dozens of, uh, units inside of one of these properties, it, it doesn't... It's not, not like your income just goes down to zero if one person moves out like it does with a single family home. So that's one thing that I absolutely love about commercial multifamily, like apartment complex investing, is that, um, the economics of it. It's the fact that you have a lot more going on. The numbers are way bigger. Yes, there's a learning curve, but it's not rocket science, right? Not rocket surgery, as my rugby coach used to say. And so you're able to... As long as you have a will, there's a way, and you can learn this. You can learn how to raise money. You can learn how to do this with other people. Uh, you can do this alone too if you want, if you're a lone wolf, but this is absolutely something you can do much more effectively with a team of people. And you can start small too. You can do, like, a 10 unit and then move on to a 15 unit, 20 unit, and kind of build your way up there. Uh, the competition is less fierce, uh, you know, in the, in the smaller sizes, and you can kind of like, you know- make some mistakes and lick your wounds without it really being detrimental early on. And then you just kind of like keep building that momentum and crush it down the road. So you might be doing a 56 or 100 unit down the road, right? Um, I just feel like there's a lot more scalability. There's a lot more you can accomplish with these because it's a business and you can use other people's money to buy these things. Like you don't need, like it is easier if you kind of show skin in the game. You're like, oh yeah, I'm gonna invest $50,000 as well. But I refuse to do that these days because I approach it with my investors from a completely different lens. I'm like, no, I unapologetically, I only take money from investors who understand that I'm not gonna put my own money into it. I'm gonna be like, look, I'm risking tens of thousands of dollars upfront to just close the deal, but then I'm gonna get that back after closing because I'm gonna raise that money from you all. And then I'm going to get an acquisition fee when I buy one of these, right? Which is like a nice hefty, uh, real estate commission, if you will, kind of like that. But the investors are giving it to you for helping acquire this for both, like everybody's behalf. And so when you do that, it's like, all right, uh, now, well, so here's my argument. Let me backtrack. I tell people that I need to do that because I need to keep increasing my own net worth and liquid cash so that I can continue getting bigger and bigger, better and better deals after this one. And the reason why I'm saying I need to be able to do it that way is because every single loan, the bigger it gets, the more net worth and liquidity I need to be able to qualify for the loan. And that's what makes it all worth it. If I'm able to, if you find investors who want to do this together, you can just grow together and it's absolutely incredible. So that's, that's why I love this business. That's why I do this business. And that's why I switched from single family to commercial. My first, my first real estate deal was a small three bedroom, two bath house. It was like $160,000 in Newnan, Georgia, and it made me $200 a month. And then I bought an apartment complex two months later with my parents as my first investors. You can tell me that I chose the easy route all you want, whatever. I'll make an episode about that later. It was a lot harder to raise money from my parents than from my investors now. And by the way, it's a lot more weight and responsibility on your shoulders. But anyway, that's how I got my start. And that makes us together $10,500 every single month, clean 10 and a half. Because the property makes like 55 to $57,000 revenue. After all expenses and the loans paid, we're left with $10,500. It's not $200, right? Yes, it was more work, but it's similar work. And it was something that it's a path very well followed. It was very doable and it was absolutely life-changing. So that's why I switched from residential single family homes to commercial multifamily or apartment complexes.