Single Family Rentals versus Multi-family Rentals

21 Replies

In my county of 240,000 people there are currently 1,342 SFH and 52 MF (2 or more units) listed for sale. So there are many more choices of properties to purchase in the SFH category.

I have both SFH and MF, but also prefer singles. I would add a few more reasons:

1.  House tenants pay more utilities like water, sewer and trash than apt. tenants.  And take care of more maintenance like cutting the grass, shoveling the snow, we just had another snow yesterday, seems like there has been snow on the ground for months.

2. House tenants bring more of their own appliances. I usually supply range only in SFH but frig and sometimes washer & dryer in Apts. Less appliances mean less repair and replacement costs. I'm not in the appliance business.

3. Tenants do tend to stay longer, and vacancy is probably the most overlooked costs in being a LL. I also think that the more things a tenant brings like heavy appliances, baby grand pianos etc, the longer they stay because they don’t want to lug that stuff around.  I have some tenants for a decade or more.

4. When you go to sell the likely buyer will be an owner occupant. They will buy the house based on sales comps and not cap rate. In other words they will be buying at a retail price. Most won't have a clue even what a cap rate is. I can only recall once that I sold a SFH to an investor, all the other sales were to owner occupants in the retail market space. The houses that I'm buying are for the most part in owner occupant neighborhoods.

5. The last SFH I bought costs $34,000, last sale was $95,000 and is 1,800 sq ft and rents for $1,250.

6. Recently a commercial property sold here for $5 million, cash in like 20 days. Guess what the cap rate was? 5%

I also prefer single family rentals.  You made good points.  I don't generally supply appliances for my single family rentals, however, unless I buy the place with the appliances.

I think you make some good points. I do not buy SFH but I am not against them, and think everything you said is true.

I chose 2-4 units mainly because of the area I buy,  In Chicago there are:

  • 445 SFH for sale with an average price of $1,150,000
  • 195 MFH for sale with an average price of $560,000

In the area I buy in Milwaukee:

  • 79 SFH for sale with an average price of 52,800
  • 121 MFH for sale with an average price of $72,000

In Chicago (North Side) it is just not feasible to buy SFH - in fact, our housing stock is less than 20% SFH and more and more you are seeing MFH be bought and converted to SFH for flips because they are so much more money. A simple zoning change (the city will almost always approve down zoning) will net you a few extra $100k

In Milwaukee I am way more open to it, but again the area I buy in has a high concentration of 2-4 unit properties so it is socially acceptable to live in an apartment vs a house and a SFH only rents for $100-$200 more

@David Krulac thanks for starting this post. I am fairly new to REI my big picture goals lean toward the MF 5+ units. I lean this way primarily because I can for the most part control the value through up keep and income. If I keep a nice updated building that commands a top rent then the value will be what it is. The investor coming in won't have much to negotiate with. So my exit strategy is more in tune with a turn key operation. Everything will be up and running when it's purchased. I of course am looking for that distress property that has a 20% occupancy with utilities that can be separated out.

Please pick apart my example for its flaws. I'm here to learn not get upset.

Yes vacancies can be a factor but in MF I shouldn't need a 100% occupancy to cash flow. If a tenant leaves a SFR I am paying that mortgage myself. If a tenant leaves a MF I feel it in my bottom line but the property should still be covering the mortgage. Another reason I like Tri and quad plexus over duplexes.

Another reason to go MF is I only have to drive to one location as opposed to all around town.

Interesting thread for sure. The more I read about SFR rentals I wish they were a little more viable where I am.

The numbers make sense only in very non-desirable areas.

I'm also pretty new at investing, I think starting out I'd rather buy a multi frst just so I could move in one unit then rent out the others. 

I think it might more of your preference and much work you want to do. The beauty of an SFH is that you only have to deal with one set of tenants vs going with a multi where it's higher returns bt higher potential headaches.

I am currently in the process of researching whether a SFH or MFH is the best option as my first investment in the Southern New Hampshire Market. I was wondering where I can find the number of SFH vs MFH in my area?

I don't prefer one over the other @David Krulac  I just go with what the market offers. In my area you have a chance at finding a SF that could be mispriced whether it be foreclosure or circumstances. With units the competition is so strong and the caps are so low that you are an interest rate increase away from losing money on a highly leveraged property. There is the risk that a smaller player like myself would have with going all in and not having the large reserves that one really should have to be in larger multis if/ when the economy tanks.

There was a commercial guy that gave a very convincing scenario about buying units and how even under bad circumstances you would be ahead so the bigger players should win in the end. He said the banks loaning on the larger properties want to see a net worth equal to the loan amount.

Duplexes don't cost much more to operate and generally bring in more but again not many in foreclose.

@Neil Schoepp  

Nothing wrong with 5 or more MFH.  You will have to get commercial financing, whereas on 4 or less you an get residential financing.  The Residential rates are a bit lower and you can get 30 year fixed.  With commercial you're probably looking at 5 year fixed, 30 amortization, then adjustable rate after 5 years.

5-20 is sort of a no man's land as a resident manager is not cost effective.  Once you get in the 20-100 range a resident manager can make sense.  Once you get 100+ then there is lots of competitive buyers in hedge funds, insurance  funds, pension funds etc.  

One strategy that can work is to buy a 4 unit, live in one unit, get FHA financing, then move after the year or so required for occupancy and do it again, rinse and repeat.

@Mario Lowe  

Exactly what I said above, buy a 4 unit FHA, owner occupied, good strategy, get 3.5% interest with only 3.55 down payment.

@Michael Noto  

The numbers make sense only in very non-desirable areas. IN YOUR AREA OF CT.

Look for underpriced properties in owner occupied neighborhoods with low crime and good schools. Check out foreclosures, REO, HUD, VA, USDA, short sales, estates, probates, and Sheriff Sales.

Or come to Pennsylvania

@David Krulac  

5-20 is sort of a no man's land as a resident manager is not cost effective. Once you get in the 20-100 range a resident manager can make sense. 

Thanks for taking the time. I hadn't given this point any thought. I will now!

@Neil Schoepp  

Don't confuse a property manager with a resident manager. PM is available even for a SFH. A resident manager is one who lives on site and usually gets free rent to manager the property, and maybe some other income depending on how much they do.

@David Krulac 

I thought you were only allowed one FHA loan at a time unless relocated via job or marriage ect.? How can you keep acquiring four plexes with FHA? Is there another type of financing you would suggest using? I am interested in acquiring 4 unit properties myself but would love to hear different strategies in doing so. I currently have a 4 unit which I used FHA.

@Matt Heath  

You can have more than one FHA mortgage, provided you have complied with the owner occupancy requirement which is at least 1 year. After that time you are free to move. And if you can't get another FHA mortgage, there are convention owner occupied mortgages for 5% down for another owner occupied 4 unit building.

@David Krulac

Would you suggest if you are a young individual to acquire as many four units as possible with 5% conventional down and living in them? Since you are putting less than 20% down you would be paying PMI though. Would you bump the down payment up to avoid this? What is the best way to scale your business in your opinion?

@Matt Heath  

the first property I bought was a duplex via FHA. Because it is relatively common, even for duplexes, the process was pretty easy. I would certainly recommend it, especially for younger folks. I know a guy from church who bought a duplex, fixed it up, moved into another one, did the same thing, then eventually moved into 4-plexes and then into multifamilies. He now owns 200+ doors and has at least 50 units ( 2 buildings) fully paid off. He is now a millionaire a few times over.

It takes commitment, but is a great way to intentionally grow your portfolio in a controlled way. 

You are way ahead of many of us! I would shoot for another 4-plex if you can find one. with 7 units rented out that would go quite a long ways to helping you gain momentum and save for the next one!

@David Krulac  

 Just to throw this out there, I have written into my leases that tenants shovel and mow. I provided a push mower and have had pretty good luck with that. granted these are 1500sqft units in a pretty decent area so my tenants treat the property much like their own. One even planted a garden which the next tenant maintained when she moved out!

I personally like the idea of multifamilies myself. I Feel like in my areas it is hard to find a decent property that can command a rent higher than cost of owning a SFH. I'm also buying for some cashflow and I feel like with SFH you are banking more on appreciation and the benefit when the property is paid off. Duplexes in my area can still bring in pretty strong tenants which is important to me also.

@Dave Carpenter

Did he use FHA several times or did he use FHA for the first property and then used conventional loans for the rest? How much down did he use? That is the strategy I would like to use since I have small capital to work with.

@Dave Carpenter 

How many years did it take him to acquire his portfolio? I would be extremely interested in talking with him over the phone or via email! I would love to learn more about his experiences! 

@Matt Heath  

When I started out I started with Nothing.  See Bigger Pockets podcast #82 for my story.  For me when starting out  I wanted to borrow as much as I could for as long as I could.  The first 11 properties were essentially 100% financed.

A friend of mine acquired 7 properties by buying a property owner occupied, staying a year or so then buying another.  He acquired a 4 unit, a 3 unit, 3 townhouses, and a farm.  always getting the lowest residential mortgage rates and always putting down as little as possible.  All legal.  Keeping the exiting property as a rental and moving on to a new one.

The downside is that he had to move into each property.  When he started he was single, but I think he's done as the wife and kids are tired of moving.

I did this on a small scale, buying my second residence because of the great owner occupied mortgage rate, and it was FHA.

In my area the taxes kill most of the good SFR rentals. I have a duplex that is ideal. It is a side-by-side with separate yards and driveways, so essentially 2 singles in one. I wish I could find more of them.

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