Should I invest in SFRs or a Small Apartment?

Question

I am in the process of selling my 3 rental properties which will leave me about $100k in cash. I am very excited to be in this position, but I am on the fence about purchasing more single-family residents, or if I should start investing in apartments.

I typically invest in slightly distressed single family homes, rehab them, then rent them for a couple of years.  To do that with 100k means I may be investing in 4 to 6 homes. That is a lot of work.  Or I could take that money and do the work one time and invest in a small apartment building?

I would use a similar strategy on the apartment where I buy it slightly distressed, rehab it, and raise rents and lower vacancy to increase my equity.

I live in DFW and the single family market is white HOT.  So I will have huge competition to get a good deal on a SFR.

WHAT WOULD YOU DO?

Curt Davis · Answer

Well what price range are you looking to buy an apartment at?  With only $100k you would obviously have to finance.  I am not too familiar with the commercial type of financing so I dont know if they will finance something needing repairs as for SFR homes the banks require the home to be in good condition.

My suggestion is if they are cheap apartments most likely they will be in low end areas.  ROI and cash flow will be great but not if the place is a pain.  Maybe stick with SFR unless your buying a nicer apartment building.

Good luck!!

Christopher Middleton · Answer

Thanks everyone for the help.

The reason I am selling and doing it over, is because most of my return comes from rehabbing the property.  The cash flow is nice, but the longer I hold the property the lower my average annual ROI is because that initial value creation is stretching over a longer period of time.

The other reason is that after 4 to 5 years after a rehab, my properties tend to have a higher frequency of maintenance requests.

Alberto Camacho · Answer

Why sell your 3 rentals to buy 3 rentals? I understand selling a under-performing property to buy one that is expected to have a better cashflow. If they are making good money why not refi? The refi could easily get you another SFR or 2, possibly even a duplex. 100K while a very nice gain can go very quickly. Now you may have had them for some time so it just might be time to get out.

My version of an MF apartment is a common property with 5 or more units. These require commercial loans.  A decision would be easier to reach with a better understanding of that process. Its possible your in a good position to get the loan so you should go speak to a lender. Commercial loans normally look for 25% down plus  1 month operating capital. You may have an excellent relationship with your lender so go chat with him. See what your funds can get you. Remember  you would be the management company.  The other side is an apartment might be out of reach. Your decision then is already be made for you.

My personal take on MF is it has to be large enough to support staffing. That might change over time but today I would not go near a smaller MF apartment if it can't pay for a property manager. I'd rather invest as a passive in a larger apartment complex and let the money grow.

Padera Lake dam is looking rough. Stay safe my friend.

Craig Solis · Answer

Congrats Christopher... Start with smaller units as you learn.  Apartments increase in value by raising income and lowering expenses.  Out of town owners, inheritance owners and poor property management can lead to inefficiencies like below market rents and unnecessary expenses.  You can capitalize by coming in and raising rents to market rate and reducing expenses.  Best of luck.

Brent Paul · Answer

There are definitely some good things about owning a multifamily.  However a lot more risk. If you don't do your homework on the area and put a bunch of improvements in a property that can't support the rental increase you will likely lose money.

But the good thing is an apartment building can have greater cash flow than a house and your tenants are all under one roof.

The other thing to look at is how easy apartment buildings are to sell in your area vs SFR.

Ken mcelroy did a really great podcast on apartments that I highly recommend you listen to.  He gives some great advice to the newbie.

Should I invest in SFRs or a Small Apartment?

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