Starting Out: Is an SFR or Duplex better?

12 Replies

I am in that "What should I buy?" stage. I've got a friend who swears by low income SFRs, and while they are cheaper to get into, I believe the cashflow from a duplex makes it a more attractive investment. However, the prices of a small multi-family unit far exceed the price of a low income SFR. Which one is better suited for my first investment property? What do you think?

Thanks in advance!

Josh

Josh, I would really encourage you to dig in and run the numbers on the two options to sort out which one to start with, as it can vary by area.

Get a really good understanding of the market rent from Craigslist, not an agent or zillow.  Get financing estimates from a few banks with a few example properties.

Run the preliminary numbers on a bunch of choices, guessing at repair costs.  For the top 4 choices, work with an agent to get inside to refine the repair costs.

Choose the option with the highest cash flow.  Would the duplex be low income too?  In low income it is all about cash flow.  

Thanks for the reply, Michele! I never thought about checking CL for rental rates! I just need to really research this out because this is going to be my first deal and I want to make sure that I do it right! Thanks so much for the input!

Josh

I'm a newbie trying to make this decision also and at least here there are the usual things to look at, rental rates, etc. But in talking to our loan officer I found out that if we are going with traditional financing I can put 20% on a SFR while 2-4 multifamily I would have to put 25% down. This changed the numbers a lot for me. However, since he is an investor also, he recommended going with the multifamily to minimize the effect of a vacancy. At least if you had a duplex you could have renters in one unit while one is vacant. If you have a vacancy in a SFR then you're in the hole.

Lots to consider. 

Welcome!

We have done very well in the class A market with single family homes. While our margin are much lower we have done very well controlling those margins. We have experienced lower expenses, no management fees because we self manage AND no vacancy. The key is to build a business model and than go from there. We don't follow the 1%, 2%, or 50% rule but we watch our margins very closely. we also are looking for long term growth and cash flow.

Look forward to seeing you around! Let me know if I can help!

Its a long shot, but do you qualify for any of the first time home buyer programs?. If the numbers work I would recommend a 4-plex. It could possibly be the lowest cost per unit you will be able to get. One thing I think seems obvious, but I seem to find myself explaining to newbies is to not buy a duplex for twice what you can buy a SFR for. All things being equal.

@Josh Johnson  

Locate and attend 3 different local REIA club meetings great place to meet people gather resources and info. Here you will meet wholesalers who provide deals and rehabbers.

Two Great reads, I bought both J. Scott The Book on Flipping Houses, The Book on Estimating ReHab Costs http://www.biggerpockets.com/flippingbook

Consider checking out HUD homes for small multi's owner occupied gets first crack. I grew up in a 2 family my first property was one also.

To find out about an area go to IREM.org search for ARM certified property managers. Call 5 ask them what parts of the city they like/dislike and why. Ask them what they see expenses running per category per unit. What do they see them selling for per unit, what is the market occupancy rate. What are the market rents? Ask them if they know anything coming up for sale. Great way to pick up some good info and possibly a deal.

Download BP’s newest book here some good due diligence in Chapter 10. Real Estate Rewind Starting over

http://www.biggerpockets.com/files/user/brandonatbp/file/real-estate-rewind-a-biggerpockets-community-book

Good Luck

Paul

@Josh Johnson

Small world I was born in Rome GA and still have some family in Rome, Rockmart, and Aargon GA. 

As far as your question, of course area is very important and I do know a little about Rome GA. Meaning, in Seattle townhouses or 2 units are very popular, where in GA an even more so Rome GA they are not as popular. 

Saying that, if I was in your shoes looking to buy my first REI, I would lean towards a SFH. I am not saying that you always have to stay with SFH maybe next investment is a 4 plex. But being my first ever rental in Rome GA I would buy a SFH. One main reason is that God forbid you want out of the rental business or maybe your stratgey changes, or something in life changes. It will be much easier to liquidate a SFH than a duplex. Its been stated that 95% of buyers on the market are looking for SFH so your pool is much bigger. You are drastically eliminating risk.

Now after you have done your first SFH and realize that you enjoy landlording and want to do more than you could begin to look at different types of rentals. duplex, triplex, quadplex etc.

Lastly, this is may not work for every investor in every area, because area is always relative. But in your area, being your first investment I would buy a SFH first.

Hope that helps a little. 

Andrew

@Andrew Cordle 

I agree & disagree. If he qualifies for a FHA loan & the numbers work & he is comfortable with a risk. I think he would be crazy to use it for a SFR. I know for a fact how difficult it is to finance a 4-plex without at least 15% down in todays lending climate. 3.5% or 5% down would leave him with money he could set aside for reserves or invest in another property. If he feels comfortable investing after that, then move forward. If not, assuming the 4-plex cash flows, he can have it professionally managed while he sells it.

The fact the 95% of buyers on the market looking for a SFR doesn't seem like a bonus to me. All that means is that you are competing with first time home buyers & flippers. Unless he is lucky, the best deals will go to one of them.

If he doesn't qualify for a First time home buyers program then a SFR might be a good choice. In most areas SFR's sell for less than 4-plexs and he will have less of his cash tied up in one deal. If he decides he doesn't like it then as you said it will probably be a easy sell.

Thanks for the input guys! @Joe Fairless - My short term goal is to replace my earned income with an unearned revenue stream as efficiently and quickly as I can. Long term, I would like to have $1M in net worth within the next five or six years and continue to build wealth and increase monthly cash flow. @Andrew Cordle- small world indeed! Thanks for the input, if you're ever in Rome, hit me up! @Rusty Thompson- I never considered a 4 plex, but I like the idea! So I can get one on a first time home buyer's program? Interesting. Never knew that. I do believe I would qualify for one, so that is definitely something worth looking into. Thanks for the advice Gents! I wish I had known about BP sooner! 

@Josh Johnson  

A standard FHA mortgage will allow you to acquire up to 4 units with 3.5% down. The problem is that your PMI lasts the life of the loan.

There is a 5% product that also has PMI, but after 5 years if there is a minimum of 20% equity you can apply to drop the PMI. which saves you the cost of a refi & the chances of higher interest rates.

After that a good vehicle to increase your portfolio is the HomePath 10% investor mortgages. Have to pick from their available properties, but cheaper than 25%.

If income stream is your goal, then your best bet is most likely multi-family.  However, it all depends on your market.  Real estate is a micro-level game.  Each one is unique.  I would recommend learning your market inside and out.  The  numbers will tell you what to do.

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