Lets say I have $1 million to work with. What are the pros and cons of owning 1 multi unit building vs. 4-5 houses as rentals for the same money?
From experience, my net worth prefers single family residence (SFR).
With the SFRs:
The tenant stays for longer period of time.
The tenant takes more pride in ownership and can be held responsible for landscaping (with the right lease).
Tenant is responsible for all utilities
Over the past 5 years I have seen greater appreciation with the SFRs
Easier to get financing on an SFR and the loan rates are somewhat subsidized in the USA for loans 1-10.
Easier to resell. Fix-up and a few accessories are appreciated on an SFR and you can get a premium from a SFR buyer. The buyer of a multi unit building is not as emotional and usually interested in only the numbers/ROI.
With the Multi Unit Buildings:
More vacancies. More turn over costs.
More landscape issues with tenants leaving trash, since it is "not their yard". Overall less tenant pride and accountability.
A large water bill - tenants will not bring leaks to your attention since they have no incentive. (Sub metering is a possible option but may lead to more vacancies).
Multi Units Buildings often make more financial sense on paper but the reality is different.
That all makes sense.
Multi family has a number of advantages. With a million dollars, you could buy a 5M building. Your maintenance and management are all in one spot. If you tend to buy and sell, it can be done in one sell transaction and one purchase. Makes for a much simpler 1031.
Forced appreciation becomes much simpler when you are dealing with one building. If you purchase a "c" building in a "b" location and wish to increase income through upgrades, you can do it all in one location dealing with only one transaction.
So if you increase the value of the property by increasing the income, sell and make a million, you can now buy a 10 million dollar property.
Let your staff deal with the picking up of litter and the tenant details.
Makes sense as well.
This is an interesting question and I'm wondering if the same arguments apply to $100k (as opposed to $1M. Is it better to start accumulating SFRs and then over time starting paying them off quickly before freeing up enough cash flow to start supporting a bigger multi family?
It's a key question when looking at things from a "how do I scale" perspective.
In general, multi's are a cash flow play and SFR's are an appreciation play. Multi's only appreciate as much as you can increase the cash flow. Also, your pool of potential buyers for a multi is smaller since it's only going to be other investors. SFR's can be bought by investors or home owners.
My experience is that you will get more cash flow for your buck with a multi. We own a 14 unit apartment building. 14 doors under 1 roof. Coin operated laundry in the basement. We bought it about 2 years ago for $335k. It produces about $7000 per month in revenue. For the same $335k would could have bought 3-4 SFR's. They would likely produce around $3200 per month in rent or so. Less than half. Plus 1 vacancy in the multi doesn't sting as much as 1 vacancy in the SFR's.
Thanks Wade. Cash flow is my main concern.
And how big reserve do you need to have for 5M multifamily ?
MFR or package of SFR depends on your business strategy. If you want almost no headache and need some additional income good quality SFR would work better. And unloading them will be easier from tax point of view as well. If you want to be more involved, growing RE business - MFR or cheap SFR may work better.
Wow! I love the analysis. I am a newbie here but have struggled with this as well.
All properties would be bought with cash. Does that make any difference in anyone's opinion?
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