To buy multiple SF or MF's or one $1M Apt. Complex?

14 Replies

I only began educating myself a couple of months ago here, I have learned a lot and I know I have much more too learn (there is always more to learn!).  I have been fairly successful in my W2 career, not always happy doing what I am doing but the rewards have been decent.  I do want to retire early enough to enjoy myself more, I have an okay work/life balance now but in say 5 years or so ideally I would like to quit my day job and have a few different sources of semi-passive income streams to enable me to spend more time doing what I like to do most (travel, spend more time with my wife and kids etc.).

So in developing a plan, I was thinking today about my current goal of buying several SF and/or MF properties with reasonable CF over then next 5+ years to supplement my "early" retirement.  I calculated what that might look like, of course a lot of what that looks like depends on how good I can buy.  I need to learn more about that and spend a lot of time researching deals in my area.  I have listened to most of the podcasts and it seems like most people start this way and then graduate to apartment buildings or commercial development deals.  And I wondered what if I defer buying those SF/MF properties and save for the large apartment complex instead. I know that not doing those smaller deals will rob me of the real life education, so that's one drawback.  But if I keep learning through BP's and possibly invest some money in the shorter term by partnering on flips or in tax liens or something I could potentially still have the liquid capital I need to invest in the big deal down the road.  I am thinking that having several (5-10) SF/MF houses might have a lower CF when I am ready to retire than the larger apartment complex deal.  Of course both depend very much on the deal(s) and how well I buy, but I'm just thinking that having more capital could net a higher CF deal.

Obviously I have no experience investing in RE yet so any thoughts or advice on this would be greatly appreciated by those who do.

Economy of scale..

Would you want to fix 10 different roofs or 1 big roof

Just a bit more work in SFR.


$1M apartment is not big by any stretch of imagination. It can be 10-30 units depending on location but the question here is how much cash flow can you get from it. Here is some "back of the napkin" analysis:

Say your market cap rate is 8%. That means your $1M apartment should generate $80K/year before finance charges and taxes. If you buy it with 25% down and 5% interest amortized over 25 years, your annual finance charges would be $52300. That includes $15K principal reduction but you cannot spend it.

Your cash flow after finance charges is $28K. Can you live on $28K/year? Probably not.

So, what do you do? You save that cash flow and then some to have enough money for a downpayment for a bigger property 5 years down the road. 

If you sell that $1M apartment for $1.125M (3% rent increase and the same cap rate) you will end up with $560-580K net cash (I assumed that all cash flow was saved and not spent). This would be enough for $2.2M apartment with $56K/yr cash flow, and so on.

After third apartment ($4.5M or so) you would have enough income to live on.

Just my .02c

Thanks @Nick B. , what you are saying makes perfect sense. Understand though that I am only comparing multiple small investments in SF/MF's over say 5 yrs vs. saving for an REI in an apartment building at the end of 5 yrs. I don't expect to live off of just that, I'm only looking to diversify and supplement other sources of retirement income. I'm just considering which option would potentially provide more cash flow.

Thanks @Hai Loc   , I've heard arguments both ways, some say there is a lot more time required on an apartment building vs. like SF or small MF investments.  

I'd rather go with multiple SF's, but that's because I can make much more per door than I can with a Multi-plex of some sort.  

I also would rather deal with 10 SF roofs, than one big one since the odds of all 10 going bad at the same time are pretty remote, but if the roof on a multi goes bad you can end up replacing the entire roof...or the equivalent of all 10 roofs, even if they may not need it.

Joe Villeneuve

So, start small now, or save and start larger later. That's basically the question I'm hearing, not SFR vs Multi.

My advice would be to start! The cool thing about real estate is that the investment grows your money for you with mortgage paydown by your tenants and maybe, possibly, some appreciation. If you want a single bigger property later then just sell off the smaller ones. Even if your timeline is only 5 years why deny yourself the power of leverage.

You know the old saying: The best time to plant a tree is thirty years ago. The next best time is today.

@Jean Bolger  , good advice, the more I think about it waiting 5 years for maybe getting better CF is probably not such a good idea, plus I don't think I have that much patience.

Originally posted by @Joe Villeneuve:

I'd rather go with multiple SF's, but that's because I can make much more per door than I can with a Multi-plex of some sort.  

I also would rather deal with 10 SF roofs, than one big one since the odds of all 10 going bad at the same time are pretty remote, but if the roof on a multi goes bad you can end up replacing the entire roof...or the equivalent of all 10 roofs, even if they may not need it.

Joe Villeneuve

 But what if the building was on two levels? Wouldn't there only be the equivalent of 5 roofs?

Economy of scale

I got 6 calls in the last 2 months that the hot water is not working and had to replace 6 hot water tanks. I got a 10 unit that only has 1 big one that I had to replaced. Cost for a contractor to come 6 different times vs once. 

1 bill for $850 or 6 bills totalling $2700

Also in a MF you can designate a tenant to help you collect rent at a reduced monthly lease. Or find a handy guy that can do basic maintenance. Even do errands for you and they are usually willing. 

Also look at the acquisition expense. Inspection on a 20 unit vs 20 SFR. Walk through 20 units or drive to 20 houses. May have to do 20 title searches too.

Another added element in support for the Large Multifamily venture is the fact that equity build has much more potential in MF than in SF if you acquire the right property.

If you have a property with low vacancy but also low rents and one that can use some cosmetic upgrades you would be positioned to increase your potential income.

Say you have a property that has good layouts in an attractive area but it really needs some modernizing in the common areas and in the units. Maybe the curb appeal is lacking and could use a good refreshing.

You first address the minimal cost landscaping making it an eye catching property. Then you move into the halls. Replacing carpet, painting halls, changing out lights to new modern LED fixtures etc. You make it a fresher, cleaner and more welcoming property.

You bump rents from say $900 to $945. More money in the bank.

A couple tenants gripe about the rent hike and move out. You then go into those units spending $4,500 in the kitchen and bath (new cabinets, counters, maybe appliances and some tile work)

You now have a fresh unit ready to lease out at a new remodeled unit price of $1,025. Do this over the course of three years and you now have a property that's valuation is significantly higher than when you bought it.

You can take additional steps in improving the attractiveness of the property by installing a fitness center, business center or a community room in an area that is not currently leasable space.

Now that you have a property that is valued higher through both forced equity (sweat equity) and pay down of mortgage you can now leverage that equity in a Cash-Out refinance and roll those funds over to a new and exciting property to repeat the cycle.

It sounds like you are positioned to leave a legacy!

Just remember this one rule: A landlord is like a gambler. When you have a full house, You raise (rents)!

One thing I forgot to mention.. Single Family will always be single family (value based on comparables) When you get into 4+ units you are getting into commercial where CAP rates really come into play. When you increase NOI and that increases the value of the property whether it's decreasing the expenses or rating rents..

Something else to thing about..

This is a great topic.  I really liked @Jean Bolger  's quote: "The best time to plant a tree is thirty years ago. The next best time is today."  The rings true in some many aspects of life!  I can't stress it enough, you must take the first step.  I do tend to think that MFs are the better strategy.  Though a mix bag can reduce your overall risk. 

Everyone will have an opinion in this arguement, my take is to do what you are comfortable my case its SF's.  Reason is I always think about what I would prefer to live in and what my exit strategy will be, always demand here for 3/2's for rent or sale.  Agree the apartments do allow a bit less in some areas, but also very difficult to sell. 

An important consideration is to make sure the two options are compared apples to apples. Often when people are talking about sfr rentals they're really talking about being landlords which is really just owning a job. When successful owners are talking about apartments they're really talking about owning a business which operates day to day with minimal input from the owner. Especially since you're thinking of this as your retirement it's important to evaluate the single family option from the point of view of the CEO who works on the business and not in the business. 

That means running the numbers with you in the CEO role and hiring out the management, maintenance and other functions whether you're looking at sfrs or apartments. Since as you say most investors gravitate to apartments eventually (Particularly after trying to operate ten or twelve sfr rentals scattered around) if you have the capital give yourself a head start by beginning with the end in mind. As @Jean Bolger said though, the important thing is to start and there's nothing wrong with an sfr or two if you can afford them now. Just make sure you don't turn your 'retirement' into another job.

Good hunting-

Thanks all for the great advice, a lot to think about!

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