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Multifamily Landlords Are More Experienced Than Single Family Landlords

by Eric Drenckhahn on July 28, 2014 · 24 comments

  
Single Family vs. Multifamily

I have to disclose, I am a multifamily housing landlord.

I have a biased opinion when it comes to whether a multifamily housing landlord is better than a single family landlord.  If you can use the analogy of college classes, multifamily housing landlord is like the person who took math and science classes.  Miss an hour of class, and you may as well drop the entire course.

A single family housing landlord is like the person who took history and music classes (no offense history and music majors…).  Miss half the semester, drink a bunch of coffee and you can get caught up.  I also have an undergraduate degree in computer science and math…

Tenant Selection

Tenant selection is the primary key to landlording success.

Bad tenants are everywhere.  By a bad tenant, I mean a tenant that may pay rent late on a habitual basis.  A tenant that you might want to non-renew their lease.  Sometimes it is a tenant you have to evict.  Or a tenant that leaves damages well beyond normal wear and tear, and even worse, beyond their damage deposit.

Related: Tenant Screening: The Ultimate Guide

Until you have had great tenants, it is near impossible to understand a bad tenant.  You just assume that all people are pigs and stay until they get evicted or asked to move.  The same is true if you have only great tenants.  You just assume that people pay rent, and leave the place in decent condition.

Multifamily housing seems to draw worse tenants than single family housing.  You have to be constantly on the lookout for subpar tenants, and avoid them at all costs, including vacancy.

Single Family Landlords Can Get By With Luck

If all you have are a few single family houses, you often are lucky with tenant selection.

You get tenants, and they stay on for years if they are good.  You replace tenants every 10 years or so; and never get to enjoy the full and complete landlord experience of a bad tenant.  Anyone can be a landlord to single family housing tenants.  It doesn’t require much skill beyond Landlording 101.

Multifamily landlording is completely different.  You have to be on top of your game, every minute, of every day.  This is graduate level landlording, especially if your housing is targeting low-income or Section 8 tenants.

If you are a rookie, multifamily housing tenants will eat you alive if you are not ready for them, or if you turn your back.  You can get great multifamily housing tenants too, but you have to target them, and cater to them,

Multifamily Tenants Have Different Goals

With multifamily housing, turnover happens more often.

It is almost by design, and has an element of adverse selection.  Multifamily tenants have shorter term goals.  Often, these tenants are saving money to buy a home.  Or they live in an apartment because they know they will be transferred to a different job location.  Or they cannot afford a single family home, so they choose multifamily.

They know the tenant qualifications are more stringent for a SFH, so they choose an apartment.  They know when their existing apartment gets run down, they trade it in for a new model in a different complex.  All of these reasons mean the tenant is probably more of a shorter term renter than longer term.

Multifamily Tenants Can Cause Move Outs

In multifamily housing, tenants need to get along with each other.

They pass each other in the hall.  They live above, below, or side by side and share walls, ceilings and floors with the tenant next door.  Sometimes they even share garages.  They know when each other is on vacation, and the next door neighbors house is vacant.

With a single family, as long as your tenant pays rent, you do not care if everyone in the neighborhood moves out.  In a multifamily, when one tenant is less than stellar, it causes move-outs among your other good tenants.  A single bad tenant can consume all of your time.  They are on your brain more than the other 99 tenants you have.  They begin to devour your every waking minute.

When you find out about a tenants subpar behavior, it is often right after the tenants move in.  Unfortunately, your other tenants who are annoyed are in the middle or the end of their lease, and can move out sooner.  You are stuck with the bad tenant, and will have a vacancy to fill.  Again.

Multifamily Applicants Are Statistically Less Qualified

When you are advertising a rental, it often seems that all you have are unqualified tenants in the marketplace.

It appears nearly everyone has poor credit, poor rental history, poor criminal record or a poor income.  This is not actually the case; there are plenty of great renters in every rental market.  Why does it seem that way then?

About 30% or renters can be problematic.  This closely follows the 80/20 rule, but multifamily housing seems to attract the extra 10%. Subpar tenants tend to stick to multifamily housing; it is cheaper and easier to qualify.   A single family landlord, who generally has a more expensive place, has the advantage and does not even have to work for it.

The fact is, with subpar renters, that 30% move more often.  I am not sure how often, but I think you can safely assume subpar renter moves at least twice as often.  They get evicted.  They get non-renewed.  They get their lease terminated.  So instead of 30% of your ad responses being tenants you do not want, it’s closer to 60%.

But the line of subpar tenants does not stop there.  Subpar tenants know they will not get accepted in many places, so they have to apply to more places.

Here again, I think you can assume they inquire to at least twice as many places as solid renters.  Solid renters inquire to the places they want to live at, subpar renters apply at any place they can.  That means, you have four times as many inquiries from subpar renters as you do solid renters, so now it’s like 75% of prospects are subpar.   WOW, no wonder it seems like eternity to get a decent renter for a showing.

So a multifamily landlord is finding new tenants more often, and has more of a chance to ‘make a mistake’ and take in a subpar tenant.  The advantage is they get the landlord and property management experience, real fast.  They understand damages, lost rent, evictions and other headaches that go along with subpar tenants.

Multifamily Has Its Advantages

Being a multifamily housing landlord does have its advantages.

Often, even extensive damages are easier and less expensive to fix.  There is generally less square footage so, by definition, there is less to go wrong.  There is less to clean.  Heating systems are often beyond the tenants reach in some sort of basement utility room.

Related: Multiplexes vs. Single Family Rentals: Which is the Better Rental Property?

When you show an apartment, you can show the apartment down the hall, as it is identical to the unit that will be opening up after your eviction completes its course.  When you have enough units, you can run continuous advertisements, so you are never trying to create an ad from scratch.  You get to be more polished in your apartment rental presentation, as you do it all the time.

Of course, the biggest advantage of being a multifamily housing landlord is you often make more money than a single family landlord.  Sometimes lots more.

15% cash-on-cash returns even with a large down payment are not uncommon.  This is because only certain people can afford to get into the real estate game, and from there only a certain amount of those people get into the rental market, and then only a certain amount of people get into multifamily housing.  The hurdle to multifamily is high; and the rewards are high too.

When you are a successful multifamily housing landlord, you are part of an elite group of landlords, and have earned your stripes.

What do you think?  Is being a multifamily housing landlord more difficult than being a single family landlord?  What type of RE investment are you pursuing?

Be sure to leave your comments below!

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{ 24 comments… read them below or add one }

Mark Ferguson July 28, 2014 at 3:09 pm

Thank you for reminding me why I have single family rentals. Hahah
I am not sure how more stress and more work makes an investment better. In my area the returns are better on single family as well.

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Eric July 28, 2014 at 3:52 pm

Thank you for the comment!

I am getting 20%+ returns in my area, from multifamilies I bought since 2008. Great job on your returns.

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Steve July 28, 2014 at 3:28 pm

I own lots of houses and about 100 multi-family doors. You missed the biggest pro of multi-family: financing is 10x easier to get. Banks fight over it.

Houses being easier to manage doesn’t mean that owners are less smart.

One more funny point, my favorite “apartment” is 9 single family houses on a lot. You get the best of both worlds.

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Eric July 28, 2014 at 3:53 pm

Thank you for the comment!

9 houses on a lot would be interesting, especially of they are nearly identical. The largest I have is a 4-plex, but i have 5 of them.

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David Krulac July 28, 2014 at 3:30 pm

Eric,

Maybe…
Maybe not….
I know one LL who has over 1,000 SFH
Another has 3,000 SFH.
I wouldn’t call either inexperienced or worse LLs than somebody who owns 1 duplex?

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Eric July 28, 2014 at 3:54 pm

Thank you for the comment!

When you have that many, you probably use someone else to do the work. The property manager is the experienced one…

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Kevin Yeats July 28, 2014 at 4:11 pm

David Krulac alluded to this question.

Eric, you commentary seems directed at owner/operator landlords. Would anything change if the owner hired a property manager?

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Eric July 28, 2014 at 4:15 pm

Thank you for the comment!

Once you have a hands off approach, I think it’s about the same. You make your decisions more often with a multifamily, but the property manager is doing most of the heavy lifting (and making quite a bit of money). By the time you see a tenant, on paper, the wheat has been sorted from the chaff.

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Serge July 28, 2014 at 4:35 pm

Eric – great article and absolutely spot on. As both a SFR and MFR investor I do agree. I find SFR much easier to work with but the right multi can be very rewarding.

Question for you – do you do all your own management? What about the larger MFR? I self manage using resident managers and have not found a PM that could do it better. A competent resident manager makes all the difference.

I think the most important point to make here is that not all MFR are created equally. Because of all the drawbacks you mention, I think its key to stay in the high C low B range of product and be sure that you have differentiators with your units. You don’t want to be one of many competing for the same low class tenants. It becomes a vicious race to the bottom.

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Eric July 28, 2014 at 8:22 pm

Thank you for the comment!

I do self manage, all 24 of my own renters and also help manage one for another owner. The largest property I have is a 4-plex, which is part of a 120 complex. I have 20 units in that complex. I have written about PMs and their incompetency before. I think I may use one at some point, but since I understand the business, it will be easier for me.

Staying high C to low B is a definite sweet spot in terms of profitability. I took my complex from a D, where I used to wear a bullet proof vest, to a B complex. I wrote about this in my blog, titled “How I turned a Class ‘D’ Apartment Classification complex into a Class ‘B’ complex”

Feel free to check out my blog, I have listed many stories about my adventures and also some basic education information.

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lamac66 July 28, 2014 at 6:53 pm

I would disagree that SFH tenants are better than MFH tenants.
But I would submit that it depends on the MFH the tenants look for. I know many a SFH tenants look for SFH because they know they won’t qualify for MFH that have thorough screening process.

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Eric July 28, 2014 at 8:24 pm

Thank you for the comment!

So you are saying all tenants are weak? That’s disheartening as I want to own a few SFHs too…

But you are correct. Many SFH are manages by owners who are inexperienced. The professional tenants have a field day with a newbie landlord.

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Mike McKinzie July 28, 2014 at 8:05 pm

More than SFR vs. MFR, I think the type of property, A, B, C or D, has much more to do with how much work is involved. A Class A multi Family is a LOT easier than a class D SFR. I have had every single problem you list with Multi’s, with my SFR. Section 8? Yep! Problems with noisy neighbors? Yep! Multiple move outs? Yep, one house had four different tenants in a calendar year. Other issues I have faced are: pot growing in the back yard, murder, a 2 year old drowning in a pool, fire, flees to my knees, roaches raining down on me when I removed wallpaper, DEA raids, Sheriff Move Outs, etc… Luckily, all of that was over 20 years ago and I haven’t had any thing more serious than a new roof, new HVAC, and general repair. But to call me “less experienced” might be a misnomer. If you want to have a challenge between 4 Class A Fourplexes and 16 Class A Single Family Residences, which requires more work, I think it would be a tough call. I will say this, over 10 years, there is a lot higher chance the SFR’s will appreciate MORE!

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Eric July 28, 2014 at 8:27 pm

Thank you for the comment!

You are correct. As a former Section 8 landlord, I have seen the worst of the worst too.

I had a murderer story too. Pretty gruesome, you can read it on my blog “Renter Horror Story – Mike The Murderer”

And I know about apartment classifications, I wrote about this in my blog, titled “How I turned a Class ‘D’ Apartment Classification complex into a Class ‘B’ complex”.

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Holly July 30, 2014 at 6:45 am

We have two single-family rental properties. We’ve had good tenants and bad tenants. We had one REALLY BAD tenant who left around $6,000 worth of damage behind. It happens sometimes!

I like to keep the long-term tenants happy so they stay. We have some excellent tenants now and I hope they never leave.

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Eric July 30, 2014 at 4:02 pm

Thank you for the comment!

One bad tenant can kill profitability for a long time. And with a $6000 worth of damages, that probably did not include vacancy expenses, or volunteer labor for yourself.

Proper screening to get a 90%+ success rate is the key.

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Cheri July 30, 2014 at 9:53 am

Wow I read what you all said. Well in 15 years I’ve not had roaches, murder or half the stuff you have. First,off never ever property management. If I have a Vegas townhome with a bad water heater,I have my retired guy pick one up and I pay by phone and I’m out $450. Instead of $800 or 1000 a management co would bill. If electric problem, I call a guy who charges $50 . I build teams, a plumber too. I can collect rent just fine. Management will take 20 percent and I’m too cheap for that, it’s bad business on my behalf. Efficient on every level !!!!!!! Cheryl ;)

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Eric July 30, 2014 at 4:03 pm

Thank you for the comment!

I self manage too, and it’s because I know more about tenant screening than any PM. it can also reduce your cash flow by 30% or more.

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DC @ Young Adult Money July 30, 2014 at 11:25 am

I can’t even really say that I’m a single family landlord. I only rent out a portion of our house, and our tenant (and former tenant) are friends/acquaintances, My goal, though is to be a multifamily housing landlord. I would love to own an apartment building one day.

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Eric July 30, 2014 at 3:47 pm

Thank you for the comment!

Multifamily has it challenges, but is generally more money than a SFH. Of course, having a tenant in your own home is the greatest challenge.

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Kim July 30, 2014 at 8:59 pm

I would get eaten alive! I do love the idea of a multiplex, but like you said, there is generally a lower class of tenants and that is certainly true in our area. Do you do section 8 tenants?

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Eric July 31, 2014 at 5:24 am

Thanks for the comment Kim!

I gave up on Section 8 tenants a while back. There are too many low quality tenants, and too much risk in the program for me. Too many broken doors, ruined carpet, new paint between each tenant, etc.

The maintenance is closer to 25% of the rents, or higher.

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Amy August 18, 2014 at 11:40 am

I love your articles! I particularly like how you broke down the math to explain why it seems only unqualified people are looking for apartments. I never thought of it that way, but it makes sense! I also noticed that since I started stating in my Craigslist ad that I do criminal background checks I get a lot fewer inquiries (although some criminals still contact me). I don’t even bother with the newspaper anymore since too many call me up in the middle of the night while drunk! It’s very frustrating, but I know good tenants are out there because I rent to some of them.

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Eric August 18, 2014 at 3:56 pm

I never pay to advertise, except once in a while through Rentbits. There are too many free ways to do it. I never advertise in the newspaper, I do not want to rent to someone that does not have access to a computer or smart phone.

Who doesn’t have internet access these days? What is their financial condition that do not use the internet? I will pass and move on to the next tenant.

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