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.
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.
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?
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.