Hey Taylor!
First congratulations on taking your real estate education seriously and putting yourself out there by posting on the BP forums. It can be an intimidating thing to do when you are just starting out and asking foundational questions.
Second, please keep in mind that what I’m going to share is my opinion and others may disagree. But, my answers are based on my actual experience being a real estate investor for the last 12+ years.
I am 41 years old and currently own 160 units. The vast majority of these units I purchased using private financing with $0 out of pocket.
To answer the first big question in your post — single family vs multi-family — I am firmly in the multi-family camp. I personally have had amazing success with properties which are between 2 and 12 units, which most people would call “small multi-family.”
There are many advantages that small multi-family properties have over single family properties in my opinion. But there are also some disadvantages. And I also think that the inventory in your market plays a large role in deciding what property type makes the most sense.
In my market, there is a large abundance of the small multi-family properties, especially the 2-4 unit properties. Additionally, in my market, a lot of these properties are located in areas where price-to-rent ratios are extremely favorable. For example, it is not unusual for me and my business partner to buy 4-unit buildings for about $250k and be able to rent them out for $4,000+/mo.
By the same token, single family properties in the same areas, at best, might sell for $100k and rent for $1500/mo. Most of the time, you’re looking at prices in the $150k+ range to get that kind of rent.
Additionally, the economies of scale really do come into play when it comes to comparing single family vs. multifamily properties. Our 8-unit buildings have one roof, one foundation, and one structure to take care of. If I were to get 8 separate single family homes, I would 8 roofs, 8 foundations, and 8 structures. The cost to maintain them probably wouldn’t be exactly 8x as compared to the single 8-unit, but it sure as hell isn’t a 1-to-1 ratio either.
Additionally, when comparing whether to build a single family portfolio or a comparable multi-family portfolio, you should also keep in mind the transactional costs involved. Each closing, whether multi-family or single family, is going to have some of the same costs: title insurance, attorney fees, inspection fees, appraisal fees, fees associated with financing, etc. To continue with the 8-unit example, you again end up spending many multiples of these costs to build a comparable portfolio of single family properties.
Another disadvantage of single family properties is that there is only one tenant per building and if they stop paying or if there is a vacancy, the entire cost of that property is on you and your wallet until you can fill that vacancy and get the rent coming in again. With a multi-family property, it is very unlikely that all of your units become vacant or non-paying at the same time. So, often times even if 1 or 2 of the units in the building are not generating any rent, the remaining rents are still enough to pay for all of your property’s expenses and you don’t have to come out of pocket to cover them. This obviously is not the case with single family properties.
With all of this said, single family properties do have some significant advantages over multifamily properties. One, they will likely appreciate more quickly than multifamily properties. Two, the tenants will likely stay longer and there will be less turnover, which mean some savings on turnover costs. Three, the tenants will be easier to manage because there won’t be any bickering or disputes between them and other tenants in the building which is common with multifamily properties.
All things considered, I still believe that multifamily properties edge out single family properties. The only exception might be if you plan to and if your market supports short term rentals. In which case, the single family properties might rival and even exceed income potential of comparably priced multi-family properties. However, short term rentals are much less passive than long term rentals and are essentially a hospitality business, which is in and of itself required a whole additional layer of knowledge and expertise.
With regard to your question about private lenders, it’s important to draw a distinction in terminology between “private” and “hard money.” Hard money lenders are much more like banks and come with many restrictions, requirements, due diligence, fees, etc. Hard money loans will almost certainly not cover 100% of the property’s purchase price and will require a chunky amount down (eg 20-30%) from you. They will also often carry very expensive interest rates and have other fees tacked on. They often also require appraisals and additional hurtles. On the other hand, true private lenders are not professional lenders and hedge fund type lenders (which is what hard money lenders are), but instead are regular people in your circle and sphere of influence. These people are not necessarily in the business of lending money and loans from them can be negotiated in any number of ways. Most of the private lenders we deal with don’t require appraisals, never set foot on any of the properties they finance for us and, best of all, often finance 100% of the purchase price and renovations. These are entirely relationship-based and do take time and energy to cultivate but are very lucrative once you cultivate them. These people can be relatives, friends, coworkers, friends of friends, and business associates. The key is that they need to know, like, and trust you. There is a lot more I could say about private lenders and how to find them, but this reply is already extremely long, so I’ll just leave it at that. Happy to chat further if you want to reach out to me with a DM.
The last thing I would tell you is that, I started my real estate journey with a house hack of a 2-family property in 2011 using bank financing. Not only is there nothing wrong with taking this approach, but I actually think this is the best way to start and the way that 99% of new investors should start their investing journey.
You get to kill multiple birds with one stone by following the house hacking strategy. You get to live in a property you own for free or almost free, while learning the ropes of being a landlord and you get very very favorable financing, where you don’t have to worry about finding private lenders or getting into any complicated or exotic investment strategies on your first deal. You do need to have steady employment, decent credit, and not be drowning in debt. But, I don’t think that should be a very high bar for you especially if you are already studying and researching this at 18 years old and you don’t plan to buy anything until 2-3 years from now at the earliest. You can very comfortably and at your own pace set yourself up for a very stable start by strategically positioning yourself to be able to buy a property this way if you start preparing now.
I hope this was helpful! Let me know if you have any follow up questions or want to connect more. Good luck!
Vitaliy