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Economy of Scale in Multi-family Real Estate Investment


Economy of Scale in Multi-family Real Estate Investment

Cost to purchase is lower per square foot or per unit:

Most good investments begin with a smart purchase, preferably below market value. The cost to build apartments or other multi-family projects are lower due to common walls, roofs and other savings that come from building multiple units in one location. In many cases, apartment units can be constructed for 30% less per square foot than comparable single family homes. So, the real estate investor starts off with more square footage to rent at a lower cost.

Management & security costs are lower per unit:

Just keeping an eye on multiple single family rental homes will require travel to check them out, no matter how far apart they may be. Grouping multiple units in one location reduces headaches and travel to keep track of them. Security costs are lower as well, if security is hired or systems set up for the properties. Many in one spot will receive a discount.

Save costs for maintenance, repairs & upkeep:

While single family investor owners may leave the everyday landscape and minor maintenance up to the tenant, they'll still get the call when something breaks. Generally, an owner can negotiate better repair and service rates with vendors who have only one location to service.

Finishes & fixture savings:

By sticking with the same color schemes for apartments, buying similar fixtures for kitchens and baths, and using common materials for all units, owners save a lot on keeping units looking good and getting them ready between tenants.

Lower taxes & finance costs per unit:

It isn't always true, but many areas will have lower real estate taxes per unit for apartments than for single family homes. This is also true because more living area square footage is concentrated on smaller land parcels. Many times, six apartment units can be constructed on less land than two single family homes.

Financing an apartment project means one loan for multiple units. This should cut per/unit costs for loan fees, appraisals, surveys, etc.

Less financial damage from vacancies:

This is another item that isn't always the case. However, marketing multiple units in one location can many times get a vacancy filled faster than advertising a home. There is also the ability to offer current tenants incentives to recommend the units to their friends, which can actually build a waiting list for units. Less time unoccupied means less of a ding on profits.

Just like soft drinks - cheaper by the six-pack:

It's almost always possible to buy a six-pack of drinks for a lower price than buying six single soft drinks. Carrying it farther, a case of 24 will mean a lower per/unit price as well. Carry this concept over to multi-family projects versus spread out single family rental homes, and you find savings as well.

There are many areas where costs can be lowered when purchasing, managing and maintaining multiple rental units in one location, many times under one roof. Some investors thinking of buying another single family rental home may find it worthwhile to think of selling the ones they own and concentrating their investment in a project with multiple units in one location.

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