Transitioning From Residential Investments to Multi-Family

Utilizing a 1031 exchange, many residential investors transition in to the multi-family commercial real estate space.

We receive many questions from residential real estate investors regarding what the main differences between residential and commercial (multi-family) real estate investing are & how they can move into the multi-family space.

Multi-family is defined as a property with 5+ units. Commercial Real Estate may seem daunting, leaving many to disregard it as they stick to what they know. However, this misconception is what generates opportunity for those who decide they want to take their investments to the next level.

Commercial Real Estate - Benefits

• Income Producing Real Estate

• Accelerated Bonus Depreciation

• Diversification with Multiple Units/Tenants

• Flexible Commercial Financing

• Less Regulation

Here in San Diego, multi-family properties are in high demand due to the housing shortage. This in turn creates beneficial tax policies for those who own these properties & further more for those who build them. Multi-Family unlike a residential investment property will have multiple tenants, allowing for risk of non-payment to diversified amongst the tenants. Securing financing for commercial properties can also be easier, as there isn’t regulating bodies as in residential financing. Meaning less red tape, creative loan terms, & quicker transactions.

Commercial Real Estate - Drawbacks

• Increased Management

• Larger Barrier To Entry

Qualifying tenants is even more important in multi-family properties as the tenants will interact with one another and one bad tenant can create turnover amongst other units. This is why many who enter the multi-family space utilize property management companies to ensure turnover is limited. Multi-family properties also come at a higher price tag. Many first time multi-family property owners utilize a 1031 exchange using proceeds from their residential investment properties to enter the multi-family space. While financing is less restricted in commercial real estate, buyers are more likely to close with a higher down payment percentage than with traditional residential financing.

For those looking to move into the multi-family space, one of the most important factors to your success is surrounding yourself with an experienced team — Broker, Financing Specialist, Title/Escrow, & Property Manager (if needed). When forming your team to support your real estate journey always interview multiple personnel to ensure you get find the right fit.

If you are interested in learning more about entering the multi-family space, give us a call and we would be happy to clear up misconceptions, and answer any questions you may have.