BiggerPockets

This topic has discussed before. Do a search on the topic. Your headline is (to my recolection) almost verbatum to the last topic.

In a nut shell, everyone had a different opinion. It is my contension that the positives are: More bank for your buck, i.e. more cash flow, multiple doors - one loan.
negatives are: Limited exit strategies (limited mostly to investors), less appreciation in some or even most cases, and higher interest rates for loans.

Bottome line: Multis of 2-4 units can be a great stepping stone to apartment buildings where the real money is at.

I started exactly two years ago, began with SFH for "safer" route to get feet wet. I am strictly buy and hold forever (unless the market heats up enough to make buying and holding less desirable than cashing out) After two years, my opinion is that SFH are a pain in the ass. The moment they're vacant, you have 100% vacancy, they are MUCH more expensive to rent, so you have fewer qualified prospects. This could just be my area. I'm in Central Maine where the media income is around 30k. I've heard others say they love SFHs - they have had 5-15 year renters. My opinion is that if you're looking for as quiet an experieince as possible, buy houses in halfway decent areas (lower mid class / mid class). Depspit the 50% rule, 2% rule, etc. etc. I've talked to many smart, rich people who've been very happy buying SFH for a slight discount and renting for 1% while the tenant pays everything.

Little tidbit of numbers geekery: I wanted to know what the rate of return was for simply having your mortage paid down by the tentant. This assumes "cash flow neutral" and does not take into account depreciation benefit, etc. It is independent of interest rate (ie. interest rate doesn't matter - as long as you're cash flow neutral, this calculation is relevant) -- buying a building with 25% down, 20 year term, cahs flow neutral (i.e. the tenants pay it down, not you) will net you a 7% return on your money. (i.e. if you put 25,000 into an investment, it has to earn 7% to give you 100,000 in 20 years, hence my conclusion) -- of course 7% isn't great, but I think it's pretty cool that you can break even cash flow wise and still earn 7% steadily as long as you hold for the entire 20 yeas.

Hello guys,

I am trying to get started with the whole landlord deal... I also have the same question (SFR vs Multi) and I like the idea of starting out with a 4plex. However, in my area, Seattle, I feel like most 4plexes are overpriced, a lot of them are 300k-500k in a decent area/lower average and when I run the numbers, cashflow is negative per the 50% rule. However, I am seeing great deals on SFR with renting potential, so here's my question:

Do you think SFR are a good idea to start out with as long as you rent them out in pieces, either by the room or at least in two pieces (i.e. main floor and basement separate?) and that way limit 100% vacancy? Any ideas? also with the market these days, how's rental demand? aren't a lot of home owners trying to rent out rooms or their basements to try to cover their mortages? any inputs are apprecated

Maximo

Maximo,

They need to be rooming houses for you to do this. You want to stick with renting the property the way it is zoned.

A general notion for beginning investors is to start small with a home or duplex and go from there. However, contrary to this belief, it can be more rewarding to start with an 8, 16, or 24 unit property. If the investor takes the time to understand the financing component of real estate investing, there is about the same amount of risk with larger properties and possibly even less.

Ryan

This post really helped me a lot. I hear all the time that the amount of work is pretty much the same so I should start with multi-unit. Great post.

Describing the perfect deal is the art side of real estate investing and will vary greatly depending on the market. My point involves someone who wants a long-term asset that operates itself with a more diversified revenue stream. If a person works with the right equity partners they can acquire healthier properties in quality locations, instead of small random rental houses. If an investor takes the time to learn accounting and can perform sound financial analysis they will increase their chances of success with bankers and equity partners.

Ryan

There is no right answer - single family vs. Multifamily. It depends on your experience and knowledge. If you're new to real estate investing, start with a house. Running a multifamily property is a business where experience is necessary. If you don't know how to run an apartment business and you buy one, you might be setting yourself up with failure.

Having turned around 100's of multifamily properties for property owners over the last 25 years from property management companies and owners who didn't know what they were doing, I would start small…including single family if you're just beginning.

@David- What kind of CAP Rates do you normally get excited about if you don't mind me asking ? I have found a few deals with 17%-20% CAP Rate and some even higher than that around like 30%. What's the magic number for you ? :mrgreen:

As with any numbers in RE, they can be manufactured and tweeked by the selling party. Since cap rates are based on the NOI which is derived from the gross rents less operating expenses, both rents and operating expenses can be exagerated for the benefit of the selling party creating false 30% cap rates. I too have yet to hear of any building producing 30% cap rates anywhere in this country.