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Why I Invest in Single Family Homes Over MultiFamily

by Mark Ferguson on March 30, 2014 · 79 comments

  
Single Family Homes

The general consensus on BiggerPockets is that multifamily housing is the best way to invest in real estate.  Many investors start out with single family homes and then hope to move up to multifamily at some point.  I have a plan to purchase 100 single family rentals and I am told all the time I need to buy multifamily instead of single family.

I am not one of those investors who believe multifamily is the best way to invest in real estate.  I have ten long-term rental properties and they are all single family homes.  There are many reasons why I invest in single family over multifamily, but the biggest reason is I make more money on single family.  I am planning on my rental properties to help me become rich and the single family is the best way for me to invest.  That does not mean single family properties are the best choice for everyone, in fact I think my market has a lot to do with how I invest.

Remember everyone needs to create their own strategy and not just copy what I do!

The cap rate and returns are very low on multifamily home in my area

In Northern Colorado the cap rates on multifamily are around 5% for properties I would want to invest in.  There are some homes with better cap rates that need a lot of work or have other serious issues.  I am not afraid of buying a home that needs work; when I say serious issues I mean foundation, structural or functional problems that cannot be fixed.

One example of a multifamily home for sale in my area right how is a four-plex built in  1971 for $275,000.  The property has 8 bedrooms, 4 baths and very basic units.  The rental income is listed as $25,200 a year before expenses.  The MLS is very lacking in information, but I am guessing the landlord pays for water, trash, yard care and possibly gas or electric.  Even though this property is listed for sale and has not sold yet, it is the cheapest four-plex for sale in the county and similar properties have sold in this price range.  If you do the math using the 50% rule this property has less than a 5% cap rate.

Single family rental property returns are higher in my area

My last single family rental property purchase was a ranch home with 4 bedrooms, 2 baths and a 2 car garage.  I bought the property for $133,000 and it is now rented for $1,400 a month.  I had to put in about $1,500 of repairs into it and it was rented less than a month after I bought it.  Looking at just the cap rate based on the 50% rule, this deal is slightly better than the four-plex.

One of the advantages of multifamily is supposed to be economy of scale.  The more units you buy and the higher price you pay, the cheaper the property should be.  However, my one unit property is giving me a better return then a four unit property that will require more management, have more turnover and more expenses.

There are many more single family properties available in my area

I did a quick search on MLS and there are a total of 15 multifamily homes with more than 3 units for sale in my entire county, which has 263,000 people.  There are 1,391 single family properties for sale in my county.  Part of my investing strategy is buying homes below market value.  I am able to buy homes cheap because they need work, they are under priced, they are short sales or estate sales.  The chances of me getting a great deal on a multifamily are pretty slim because there are so few for sale.  My chances are still slim with single family in our current market, but they are much better due to the number of single family homes.

I am able to buy single family homes below market value

Some investors think the valuation of multifamily homes is an advantage, because the value is based on the income the property produces.  You always know what the value is based on the local market cap rates.  The value can be increased by increasing the rents or adding units.  The best way to buy a multifamily property cheap is if it is mismanaged, under rented or has other issues.  Increasing the value of a multifamily involves finding new tenants, improving management or increasing the income in another way.

Single family homes are not valued based on income, they are usually valued based on what a an owner occupant buyer will pay for them.  If you can find an area that has high rents compared to house values, there is opportunity to make more money on single family homes than multifamily.  If a home needs a lot of work most owner occupants will not be able to finance the home.  An investor will have to buy the home at a significant discount.  Most buyers do not want to wait months for a short sale like an investor will.  Some houses are just under priced because the sellers want out quick or their agent doesn’t know what they are doing.

The house I bought for $133,000 could be sold right now for $155,000 to $165,000 and I bought it in February.  As soon as I bought the home I gained $30,000 in equity by only doing a few minor repairs.  I believe this particular home was under priced by the agent and that is why it was so cheap.  This is how I buy all of my single family homes, although most require $10,000 to $20,000 in work.  I always buy my properties so that I gain a significant amount of equity as soon as I close.  In my opinion it is hard to do this with multifamily because there are so few of them and the way they are valued.

Single family homes are less expensive to buy

Single family homes are usually less expensive to buy than multifamily and that lets me invest more often.  If I wanted to buy $300,000 complexes, I would have to wait longer to save up enough money for the down payment.  I could buy two $100,000 single family homes, rent them and be bringing in rent before I could save up enough to buy the $300,000 multifamily.   Once I saved up enough money for the multifamily I may have to wait longer for the right property to come along.  Because there are so few multifamily properties I may have to wait a long time.

Appreciation is higher on single family homes

Single family homes historically appreciate more than multifamily properties.  Multifamily properties are valued on the rents coming in and condition, while most single family homes are valued on supply and demand of owner occupied buyers.  If rents go up in an area, then multifamily housing prices will rise as well, but only if the rents are raised to meet market rental rates.  It is not always easy to raise the rents on good tenants who are paying on time.  

It is easier to finance single family homes

If I am buying 1-4 unit properties I can get the same terms if I buy single family or multifamily.  But if I were to buy a 5 unit property I would have to move into a commercial loan.  With commercial the down payments increase, the rates increase and a balloon may be put in place.  I can stick with 30 year amortized loans on my single family rentals and though they are ARM’s, they do not have a balloon payment.

It is easier to manage single family homes

The homes I buy are mid-range rentals that tend to have very stable tenants.  On 3 of my ten rentals I have had tenants in place for more than a year.(four of my rentals were purchased within a year).  The tenants also pay for all utilities, mow their own grass and generally take very good care of the homes.  On single family rentals I think the tenants tend to take better care of the homes because they feel it is their house more than an apartment is.

I know single family better than multifamily

I have been a licensed agent since 2001 and sell many single family homes very year.  I know single family homes, because they are my business.  I sell a few multifamily properties, but rarely more than 2 units.  I know the values on single family homes as well as what to look our for better than I do multifamily homes.  This is why it is so important to create your own investing strategy.

Conclusion

I have bought ten rental properties in the last 3 years and 4 months.  I have gained about $400,000 in equity from those rental properties thanks to buying below market value and appreciation.  I am going to keep buying single family homes because I can get better deals, I can manage them easier, they appreciate more and I can buy them quicker.  If I lived in an area that had much higher cap rates, then it might make sense to buy multifamily, but I don’t.

What are your thoughts on single family homes as an investment?

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{ 79 comments… read them below or add one }

Mike McKinzie March 30, 2014 at 9:40 am

I agree Mark. In Southern California, most class A multi family properties go in the 2-3% Cap Rate range. If you want to go above 6%, you will need to carry a sidearm to collect rent. Another positive with SFR is when you decide to sell, there is a much larger market of buyers. I am with you, 100 SFR in a variety of markets is my goal.

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Mark Ferguson March 30, 2014 at 11:01 am

Hi Mike, you are correct. If you ever need to liquidate SFR there are many more buyers out there. I also thinknitnis easier to add value. New carpet and paint will add a lot of value to an SFR. It might not add any value to a multifamily unless the rents are also raised.

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Rodney March 30, 2014 at 9:42 am

I agree and I too am focusing on SFR as I start out. I would like to also purchase properties where I gain a lot of instant equity from purchasing the property under market value. But can you tell me, how do I actually know how much equity I will have going in? I won’t be able to tell that until I have the property under contract and get the appraisal back as best I can tell? By that time, it could be too late as I’d already be committed to the deal, regardless of the equity.

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Mark Ferguson March 30, 2014 at 11:05 am

Rodney, you should be able to tell the market value by the comps out there and help from a real estate agent. You should not base your value off of the appraisal. The reason is appraisers rarely value the home over the purchase price no matter how good the deal is. Appraisers are scared of valuing properties too high and are mostly concerned with the value of the appraisals being at least as much as te contract price.

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James Pratt March 30, 2014 at 9:49 am

Mark, I completely agree with you. Single family homes are great money makers when one buys in the right areas at 60-70 cents on the dollar. By adding value your equity increases as does the rent (cash flow). I learn over many years that tenants take a lot better care of SFR then ones in multi units do and stay for a lot longer period of time.

The problem I have even though I keep my rentals in top notch condition is that there still is repairs that’s needed. With the amount of rentals I have spread all over that’s keep me busy at times. Where as a large multi unit is in one place, with an onsite manager, would cut my time way down.

I been working on an exit strategy for many years and can’t come up with one that provides the income or any way near the returns I get from my SFR. What to do, what to do?

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Mark Ferguson March 30, 2014 at 11:07 am

Hi James. I started having my team manage my properties now that I have ten. It can be difficult managing a lot f properties in multiple locations. I think the returns are still better even if I had to hire a pm.

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Riley F. March 30, 2014 at 10:13 am

Rodney – Comps should give you a really good idea of what kind of equity you’ll have going in. I would say that you should take a look at ARV of comps, subtract the purchase price, closing costs, and repairs, then add in your down payment and you have your equity. Subtract out your down payment if you want to know what equity was created at purchase.

I know that I’m quite new, but I find that real estate deals can be more easily measured with a yard stick than with ruler. What I’m trying to say is “if you have to worry about being a couple $1000 off in your ARV, there probably isn’t enough meat on the bone to make the purchase a deal”.

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Rodney March 30, 2014 at 10:42 am

Riley, right. I guess what I was trying to get at more is that until the appraisal comes back, I can’t know for sure if I bought the property under market value, can I? For example, say I think I have found a nice deal on a property that doesn’t need a lot of rehab. I purchase it for $50k, thinking that the ARV is probably $60k. Only the appraisal comes back and says the market value is only $50k. By that point, I’m set on the deal, but it’s suddenly not as good of a deal without the added $10k in equity.

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Mark Ferguson March 30, 2014 at 11:10 am

Rodney, value is based off what buyers will pay for a home not what an appraisal says. The comps will tell you what buyers are paying and should give you a great idea of what a home is worth. Many times the appraisal is just there to confirm the home is worth at least as much as the purchase.

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Sharon Tzib March 30, 2014 at 11:29 am

Well if you bought a home that didn’t need a lot of rehab for a $10K spread, then more than likely you are buying to hold. In that case, even if you misjudged, you still have time to make up the difference by not selling. In other words, unless this is a flip, the ARV will be an ever moving target – you can never be 100% sure of your equity going in, as over the life of holding the property, as it will constantly be changing.

Now if this was a flip, you would want to make darn sure you got a killer deal. This is why many flippers use the 60-70% rule when they buy, although in the current market, I read where some are having to use an 80% rule. Again, this just demonstrates how dynamic real estate values are.

Rodney March 30, 2014 at 11:29 am

Mark, thanks for the reply! I’m new at this (closing on my first rental on the 2nd!). But so if I were looking a few years down the road at taking out a HELOC on the property to use the equity to purchase more property, isn’t that based off the appraisal? If I’m financing a property, the appraisal tells the bank the amount they can finance, right?

For my property I am putting 20% down, so essentially I have 20% equity plus the difference between the purchase price and the market value. I’m just not sure how to calculate that accurately at this point.

Mark Ferguson March 30, 2014 at 11:33 am

Sharon, true on rentals, equity is not as important as cash flow to me. It is nice to have. I can’t imagine trying to flip using the 80% rule. That would be asking for loss after loss.

Sharon Tzib March 30, 2014 at 11:37 am

I know right, Mark! It’s insanity to me, but I’ve seen this commented about more than once. Not my cup of tea!

Rodney, a HELOC is a totally different situation that the first example you presented. Yes, an appraisal will be required for you to obtain one, but keep in mind – appraisers use comps to ascertain value as well, so if you use comps when you get closer to applying for the HELOC, the value the appraiser gets should be reasonably close. If it isn’t, then you may have received a bad appraisal, and you can either request a new one or go find a different lender.

Mark Ferguson March 30, 2014 at 11:38 am

Rodney, you correct on the appraisal is used to determine a refiannce amount. In that case the bank will order a new appraisal and the appraiser has to determine value without a purchase price. Hopefully appraisers will come close to market value on a refinance. I think there is a better chance of an appraiser coming in close to market value on a rehabbed refinance then a smoking purchase deal.

The appraisal helps determine how much the bank will finance. But on a new purchase the bank will finance the lower of the two values; purchase price or appraisal. It doesn’t really matter if te appraisal comes in high and te appraisers know this.

Rodney March 30, 2014 at 11:41 am

Thanks for the replies Mark and Sharon. That makes sense.

Yeah, it’s a buy and hold. Definitely not a flip at that small spread!

Mark, I agree cash flow is what I’m looking for first, but equity would also be nice as it would provide more options quicker.

Mark Ferguson March 30, 2014 at 2:58 pm

Rodney, I love equity as well. Almost all of the long term rentals I buy could be flipped for a modest profit.

Mark Ferguson March 30, 2014 at 11:08 am

Exactly Riley. An investor and agent should be able to figure values without an appraisal.

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Sharon Tzib March 30, 2014 at 10:32 am

Oh how I love the debate Ben and you have going on this, lol!

Honestly though, this conversation is soooo dependent on many factors, such as the market you are in, the economy, the skill set of the investor, as well as their ability to obtain financing creatively, among other factors.

Obviously, it’s not a black and white decision. Nice seeing both sides of the coin so investors can decide what works for them.

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Mark Ferguson March 30, 2014 at 11:11 am

Very true! If I was in bens market I may buy multifamily.

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Ben Leybovich March 30, 2014 at 1:18 pm

Sharon – what debate…? I don’t know of any such debate – Mark?!

Mark – I am putting you on ice for now. On Tuesday, I am not having a debate with Brandon again :)

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Mark Ferguson March 30, 2014 at 2:59 pm

Thanks Ben. I think it is more of a market thing than anything else.

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Craig Horton March 30, 2014 at 10:43 am

I have been a real estate investor for over 39 years now. I have owned both apartments and single family homes long term for buy and hold. Most of my holdings are single family homes.
The big difference in the two areas of ownership are that single family homes are easier to manage in my opinion. Also, residents tend to rent houses for longer periods of time.
One of my mentors in the single family home business is John Schaub. His philosophy which is oriented toward single family homes is similar to mine.

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Mark Ferguson March 30, 2014 at 11:13 am

Thanks for the comment Craig! Now where are the multifamily guys ?

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Paul Salmela March 30, 2014 at 11:36 am

I agree with most of this article and have chosen much of the of the same strategies. I have purchased several SFHs in the last 5 years and the CAP rates have been much higher than apartment buildings. Lately prices have come up quite a bit to the point where it’s nearly impossible to find homes worth purchasing. Time to sell?

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Mark Ferguson March 30, 2014 at 11:42 am

Paul, I am seeing the same thing but rents are also increasing. With increasing rents I am seeing increased cash flows. I am not planning to sell anytime soon. When you sell you have to pay commissions, taxes, recaptured depreciation and where am I going to reinvest that money of I can’t find great deals on rental properties anymore?

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Ryan March 30, 2014 at 11:55 am

Wife and I own both SFR and MFR. There are a couple of things I have learned from personal experience that don’t go along with traditional wisdom. The first is that MFR value is strictly based off of rental income, this is not always true. MFR always have the potential for condo conversion and I’ve found MFR in my markets more closely appreciate/depreciate with SFR $/sqft than rents. With this concept in mind I can prove one value of MFR. A property wife and I bought was a 4-plex, Class B, gross income $42k/year, for $300k. We bought under FHA and lived in it for a couple of years and did repairs so put about $20k down when we bought it years ago. Rents have not risen much, however, MFR sales have tracked SFR $/sqft roughly and offset MFR comps are now selling for $450-$500k. Over the years our $20k down has multiplied while we have had positive cash flow the entire time. If we’d owned several SFR’s we could have had just as good of appreciation, however, we would not have been able to use this kind of leverage. On the downside of MFR I have found that on paper MFR look better than SFR. In reality, higher turnover and costs like lawn/water/gas/garbage really eats into your profit margin. I get more money coming into the bank account off of SFR, they are easier to buy/sell/manage. There are some advantages to MFR but if you are looking for safe/steady cash flow I would go with SFR all the way. If you are looking to highly leverage your property then MFR are great. Also closing costs for buying/refinance/selling for one property versus ten can be significant over the long-term if you do this frequently. That is one big downside of trying to use leverage in your SFR’s.

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Mark Ferguson March 30, 2014 at 3:02 pm

That is true about the condo conversion, but that does take a lot of work and planning to pull off.

If you are strictly talking about buying a property as an owner occupant then buying multi does leverage your money better as well.

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David Krulac March 30, 2014 at 1:58 pm

In my county of 240,000 people there are currently 1,342 SFH and 52 MF (2 or more units) listed for sale.

I have both SFH and MF, but also prefer singles. I would add a few more reasons:

1. House tenants bring more of their own appliances. I usually supply range only in SFH but frig and sometimes washer & dryer in Apts. Less appliances mean less repair and replacement costs. I’m not in the appliance business.
2. Tenants do tend to stay longer, and vacancy is probably the most overlooked costs in being a LL. I also think that the more things a tenant brings like heavy appliances, baby grand pianos etc, the longer they stay because they don’t want to lug that stuff around.
3. When you go to sell the likely buyer will be an owner occupant. They will buy the house based on sales comps and not cap rate. Most won’t have a clue even what a cap rate is.
4. The last SFH I bought costs $34,000, last sale was $95,000 and is 1,800 sq ft and rents for $1,250.
5. Recently a commercial property sold here for $5 million, cash in like 20 days. Guess what the cap rate was? 5%

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Mark Ferguson March 30, 2014 at 3:04 pm

Hi David, I typically provide a fridge, stove and dishwasher , but not washer and dryer. That is a great point. That is what commercial and multi unit deals look like in my area as well. It is crazy.

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Adam Schneider March 30, 2014 at 2:35 pm

Great perspective–all makes sense.

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Mark Ferguson March 30, 2014 at 3:05 pm

Thank you Adam!

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Brian Burke March 30, 2014 at 3:37 pm

Which is better? There is no right answer for everyone. It depends on each investor’s circumstance. Do you want to stay in your market or are you willing to travel? How much capital do you have to work with? What experience do you have? How much time do you have? What connections do you have? All of those factors, among others, will dictate which strategy will work best for YOU.

Drawing on my experience with both types, they work equally well for me. Each one has a purpose. MF allows me to allocate larger slices of capital quickly, and a value-add property allows me to capture a lot of upside on a property large enough to support a first-class team. SFR allows me to acquire a lot of properties below market value in a market with a lot of appreciation potential and lacks the exposure to cap rate risk on the exit.

There are pluses and minuses to each, and declaring the race winner is impossible because the potential outcomes are as numerous as the properties themselves.

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Mark Ferguson March 30, 2014 at 8:45 pm

Nice comment Brian. I agree! For others multifamily may work best. For me and my market it is multifamily.

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Swat Khan April 3, 2014 at 8:52 pm

Brian, ditto. I was going to respond with similar points to yours. You said it much more detailed and eloquently than me. -SK-

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John Thedford March 30, 2014 at 5:09 pm

I agree Mark! I have one property that appreciated over 30% since this time last year. Every SFR I own has done well and we have a very strong rental market. I have only had one turnover in tenants since 2012. I see nothing wrong with multi-family and in some cases it may generate better returns. Everyone has their strategy, likes and dislikes. As long as we all enjoy what we are doing, make a profit, and meet our goals there really is no “right” or “wrong”.
Take care!
John

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Mark Ferguson March 30, 2014 at 8:47 pm

Exactly John. Thanks for the comment and that is nice appreciation!

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Brad Boone March 30, 2014 at 7:02 pm

I buy both but the SFR have longer term tenants more pride of ownership the apartments and mobile home park cash flow better and help buy more SFR.

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Mark Ferguson March 30, 2014 at 8:49 pm

I have never ventures I to Mobile home or manufactured homes myself. I imagine some would cash flow great.

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Steve March 30, 2014 at 7:09 pm

Mark,

You nailed it. We think alike when it comes to SFR’s. I am in So CO, and over the last year I have had to gradually move further out from my core area to find properties. This has been due to the obvious price increases, and possibly increased competition as well. Have you faced the same, and how is your pool of renters different? I have learned that very strict screening becomes far more important when you move out into the mountain towns.

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Mark Ferguson March 30, 2014 at 8:53 pm

Hi Steve, I bought my first house outside my core buying area this month. It is only five miles away. I haven’t had to venture out too far. Tenant screening is of huge importance no matter where you invest. I am seeing higher prices and higher rents. I am still finding a few deals though.

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Dawn Anastasi March 30, 2014 at 7:52 pm

I have two duplexes but I like single family homes better as well.

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Mark Ferguson March 30, 2014 at 8:55 pm

Dawn, I like the numbers I see on your SFR as well! Have you bought any recently?

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Danny N March 30, 2014 at 8:23 pm

Hey Mark,

I am sure there will be a lot of debate regarding your article. I like your contrarian investment approach. I have discovered that in RE, You have to find out whats going to work for you and JUST DO IT! RE Markets are different everywhere in the U.S. and where one type of investing style works in a certain area, it may not work in others. Kudos to you for making SFR Rentals work!

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Mark Ferguson March 30, 2014 at 9:48 pm

Thank you Danny! I am actually surprised how few people have offered any resistance to my view point!

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Stanton Flemmings March 30, 2014 at 8:26 pm

Mark, I agree for ALL of the reasons you mention in the article. I’m from the St. Louis area and I have been purchasing single family homes for the past 4 years at great values in solid neighborhoods as well as a few mufti-families. One glaring item that I see that you didn’t mention is turnover. I have an 8 unit building that turns over about 3-4 units per year. While my average 2 and 3 bedroom SF turns over about every 3 years.

I love Single Families!!!

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Mark Ferguson March 30, 2014 at 9:50 pm

Thanks Stanton. I thought I mentioned I have less turnover somewhere in the article. That is a definite plus!

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Sharon Tzib March 31, 2014 at 9:18 am

No, you’re not losing your mind, Mark. You did, twice:

“However, my one unit property is giving me a better return then a four unit property that will require more management, have more turnover and more expenses.”

“On 3 of my ten rentals I have had tenants in place for more than a year (four of my rentals were purchased within a year).”

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mark ferguson March 31, 2014 at 10:03 am

Thanks Sharon!

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Robert March 31, 2014 at 7:57 am

I own two 35 unit apartment buildings and one 16 apt with 6 stores and one with 2 apts and 2 stores. Most in New York City I started out in 1980 in the South Bronx. Have made good money but it has been a tough go. Multifam has a lot of benefits the primary being that you have a resident super, financing is available and rents can move up quickly over time if you buy in an improving neighborhood. Also you can do a 1031 exchnage into a NNN property – this is a great exit strategy.

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mark ferguson March 31, 2014 at 10:05 am

Hi Robert,
Why do you say it was a tough go? have you ever had single family rentals? I imagine investing in NY is interesting!

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Robert March 31, 2014 at 12:08 pm

Hi Mark:
I never had any single family rentals althoug the first property I bought was a two famlily house in Staten Island , NY. I lived in the basement and rented out the upstairs two apartments. I took out a home imporvement loan on that house and then bought a 42 family apartment buildng in the South Bronx in 1980. New York City in the 1980’s was a rough place, high crime and the economy was not so good. The New York City rent regulatory regime was and is one of the biggest challenges facing property investors in New York City. The CIty cannabliized itself back in the 70’s by forcing owners to abandon their properties because they could not run them for a profit. The rent control system and the lack of justice for owners in the Housing Courts caused massive waves of abandonment . Led some criminal owner to burn their buildings for the insurance proceeds. Led to huge swaths of the city becoming abandonded burned out wasteland / hell holes. Yeah it was real interesting. I want to write a book when I get the time.

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Mark Ferguson March 31, 2014 at 12:56 pm

That deserves a book for sure! I had no idea.

Seth Wilson March 31, 2014 at 11:22 am

The reason I only currently do multifamily, >10 units, is because I don’t know of any billionaire SFR investors.

“If you want to launch big ships you have to go where the water is deep”

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Mark Ferguson March 31, 2014 at 11:46 am

Do you know any billionaire multifamily investors? I could see why an investor would invest in multi due to economies of scale when you have millions to invest. Did any billionaires get there billion by investing in multi or any type of real estate? I could see developers possibly doing it.

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Chad Carson April 8, 2014 at 9:08 pm

More power to you Seth! I can say I read your comment back in the day before you were a billionaire:)

I have no desire to be a billionaire, not because I wouldn’t take the money if it fell in my lap, but because I don’t want all the hassle associated with the climb.

I have small multifamily and single family (similar in my book) for the reasons Mark mentioned in the article. And they will grow my wealth and income at great rates, I will have more income than I can handle for the rest of my life, and I most importantly will have tons of time to do all sorts of things otherwise.

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Mark Ferguson April 8, 2014 at 9:14 pm

Thanks for the comment Chad. I would be okay with being a billionaire. :). Sounds like you have a good plan. I will say that money can buy more time. You can buy people to do work for you!

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Seth Wilson March 31, 2014 at 12:14 pm

http://en.wikipedia.org/wiki/Sam_Zell
http://en.wikipedia.org/wiki/Jorge_M._P%C3%A9rez

Look at their career path. Low end apartments, higher end apartments/condos, development. Their books “Powerhouse Principles” and “Bullsh*t Talks, Money Walks” are great blueprints to follow. They tell you step-by-step how they did it. Now Sam Zell’s book isn’t written by him but you can watch plenty of his clips on CNBC.

They became millionaires due to their apartments, and graduated to development, then became billionaires.

I am not trying to shoot holes in your plan or troll you but I am trying to follow their paths. and if I fall short–$100 million wouldn’t be so bad…

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Mark Ferguson March 31, 2014 at 1:07 pm

I’ll take 100 million! I seriously appreciate the comment. I have learned and changed more than a few things based off comments from my articles. I’ll check out those books.

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Adrian Tilley March 31, 2014 at 12:22 pm

So true, the multifamily listings in Colorado are miserable. I would love someone to do an article on the best ways to find multis for less than retail.

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Mark Ferguson March 31, 2014 at 12:55 pm

That sounds like a job for Ben.

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Jared Stasch March 31, 2014 at 3:10 pm

4plexes and below aren’t really Multi Family in terms of pricing and how the government sees them. The Cap rate on something like a 4plex is always low since they are so closely tied to the single family home market and rent versus value is very low. A fourplex can be $90,000 a unit and down the street is a 42 unit building at $60,000 a unit.

I think the problem you are running into with Multi Family is you are aiming low in terms of units. Running a fourplex is just as time consuming as running a 50 unit building with a property manager doing the work for you. And that’s what we look for. Burnt out land lords who don’t know market rents and have a lot of deferred maintenance. Lot’s of opportunity in real Multi Family

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mark ferguson March 31, 2014 at 4:28 pm

Hi Jared, great points. In my area there are no large complexes for sale like that. I just looked and the most expensive multifamily is 8, 2 bedroom units under contract for $715,000. I looked at solds in the last 6 months and there was a 16 unit that sold for $608,000, but it is classified as low income with rent restrictions and had an advertised cap rate of 3.6%.

In my experience the cap rate does not increase the higher the price in my area. It may be different for some off market properties or in different states.

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Anthony Livingston April 1, 2014 at 4:51 am

Just like every other aspect in life – it depends. I’d personally prefer to invest in a multifamily house, if I know that our family friends are moving with us. This would be great. Actually this can be the only possibility I’d prefer multifamily house over a single one.

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mark ferguson April 1, 2014 at 2:49 pm

Anthony that sounds like a great reason to buy multifamily. Thank you for the message.

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Kirsten Walstedt April 1, 2014 at 8:19 am

I am just starting out so not ready for huge multifamilies yet. I would love to find some SFHs that are low enough priced that I can hit 1.5% or better on renting them out. Still looking. The sub $200,000 market is soft right now and rents are rising.

I like to dream, so I look at some larger properties on Loopnet and imagine buying a huge complex. There’s an interesting 76 unit 5 building complex in a good area of Phoenix on the market for $2.4 million right now. I am not in that league yet, but I like to go through the numbers as an exercise and as a way of “envisioning” myself doing that in future.

One question – I am wondering what is meant by “a value-add property”?

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mark ferguson April 1, 2014 at 2:51 pm

Hi Kirsten, I think value add property means the rents can be raised or improvements made to add value to the property. Maybe it is mismanaged currently. It is tough to find 1.5 ratio properties in my area. Most of mine are in the 1.2 range

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Kirsten Walstedt April 1, 2014 at 9:47 pm

Thanks, Mark!

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Jerry Kaidor April 2, 2014 at 9:07 am

OK, here’ s an advantage to multifamily – no, not duplexes and fourplexes, but REAL multifamily:
….You get to hire a staff. Your staff is there, they’re watching. Somebody starts dealing drugs, staff can catch’m quick. With an SFR, unless neighbors complain, they might deal drugs for months before you notice.

My neighbor rented out his house. Nice people, hardly knew they were there. Real quiet. Because they were running a marijuana grow operation in there. They did something like $20K of damage to his house. Got away with it for a couple of years.

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mark ferguson April 2, 2014 at 9:37 am

Hi Jerry that is true, but I think if a landlord doesn’t see their house for two years they are asking for trouble. I think there are many ways to see a house at least every 6 months by replacing furnace filters and doing routine maintenance.

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Abel Vazquez April 2, 2014 at 11:35 am

I personally am a multi guy but you make some great points here. For example when you said that everybody’s market is different therefore you have to know what is more trendy in your area and know your market well to know what will be more profitable. Another thing that I totally agree on is that when you rent single family homes the tenants get more attached to the property therefore giving you a lower vacancy rate and they also take better care of your property. Awesome article.

Abel

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Mark Ferguson April 2, 2014 at 11:44 am

Tha k you Abel!

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Danny N April 2, 2014 at 2:16 pm

@ jerry kaidor, I don’t think Mark is negating multi’s as a strategy, yes it does work and has worked for most people,BUT He is just saying the advantages in his market for renting out SFR Instead of multis
Actually I would argue the opposite about hiring a staff to watch over your multi as an advantage, I think they help but that”s not the all and be all. Talk to most Landlords and I can guarantee you that No one will ever take better care of your property than you the owner, the person who worked hard and put their capital at stake to acquire the property.
AS a matter of fact in my area, the cases of people growing / selling pot are mostly done by people in apartment complexes surprisingly

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mark ferguson April 2, 2014 at 4:23 pm

Danny, I would guess most drug use is in apartments around here as well. As you said the onsite manager is not always the best overseer. I was an onsite manager once just out of college and I was more concerned with hanging out with the other tenants than I was looking for signs of trouble.

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Jerry Kaidor April 3, 2014 at 5:20 am

Don’t count on it. Drug use mostly in apartments, that is. And in an apartment complex, the manager is not the only overseer. When I started up my business, I invested in a toll-free line. It is available to all my tenants. It has business hours, so I don’t get bothered at night. People call and tell me things. Sometimes it’s annoying ( “Bob in #7 is parking in my space!” ), but other times it’s been vital ( “Your maintenance guy is doing meth” ).

– JerryK

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Mark Ferguson April 6, 2014 at 9:58 am

Jerry there is one more thing to consider as well. If a single family home becomes a meth lab then that one house may have to be gutted. If an apartment building has one apartment become a meth lab, the entire building may have to be vacated and gutted. I saw a 30 unit complex have to be gutted thanks to a meth lab.

Shaun April 2, 2014 at 10:38 pm

Different strokes for different folks.
There is no one right answer.
SFR will work best for some people and MFR will work better for others.

Different markets, different goals, different personal strengths, different opportunities, etc., etc., etc…………

Figure out all the above and anything else that is relevant to you and evaluate all the strategies available to figure out what works best for you.
(But be ready to adapt once you get into it)

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Mark Ferguson April 3, 2014 at 1:22 pm

Exactly Shaun, Thank you for the comment

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Chad Carson April 8, 2014 at 9:15 pm

Mark,
I agree with all you benefits of single family investing, but I also think a MAJOR benefit not mentioned is risk reduction.

If you own 10 different houses in 10 different locations, you’re reducing the chance that one bad purchase can wreck your whole portfolio. If you screw up and buy a 10-unit in a location that goes bad, at no fault of your own, you lose it all on one roll of the dice.

I also like that even if you screw up on a single family purchase, as you said, you can liquidate and get out of it for a loss and move on. This is more stock-market-like than multiunits.

I hear all the multi-unit and net-lease plans of trading-up to simplify your life, but you’ve just thrown all your hard-earned savings into one basket! Not always smart.

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mark ferguson April 15, 2014 at 10:51 am

Great points Chad!

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