Multi Family vs Single Family Property

9 Replies

I'm a newbie when it comes to investing. I've been reading a real estate investment book and have been listening to the bigger pockets podcast for the past 3 months. Here is my situation. I'm looking to purchase property in the the Long Beach or Bell Flower area of California. I have a total of $40,000 max that I am willing to spend on a down payment and closing cost. Since I am a first time buyer, I'm looking to pay only 3.5% for the down payment through the FHA first time buyer program. My ultimate goal is to obtain enough properties to gain passive income that will ultimately replace my current income. I would like to obtain this goal within the next 7 years. I am torn at this moment between purchasing a multifamily or a single family home. The incentive to purchasing a multifamily is that I would only have to put 3.5% down since I am a first time buyer. My family and I would live in one of the units and use the rent from the other tenants to help pay the mortgage. Apart of me feels like I should take advantage of this now while I'm a first time buyer. (Am I even being realistic that I could a purchase a decent multiunit with an FHA loan in the Long Beach, Bell Flower area) The downside to purchasing a multifamily is that I will not have much liquid available after the purchase of the multifamily. Therefore, I would most likely have to wait for the property to appreciate and take equity out before purchasing another property. My real estate agent told me that it could take a while for multiunits in this area to appreciate. Therefore, maybe it's better to purchase a single family with the FHA loan and do a live in flip. I would have more of a liquid cushion after the purchase and I was told that it would probably appreciate faster. As well, there are other special first time buyer programs in California that will even pay your 3.5% down payment that I qualify for. However, this special program that will pay the down payment is only for single family homes. Overall, I don't want to bite off more than I could chew with the multi unit and have a small cushion of money in my bank account for emergencies. However, I really do want to take advantage of purchasing a multiunit while I am only able to put 3.5% down. What should I do?

P.S.  Should I even be looking to purchase property at all right now.  I keep hearing that it is a sellers market as home prices have been skyrocketing in the Los Angeles area.  It is very hard to find good deals.  I keep hearing a lot of chatter about the potential for a housing crash in the near future.  Should I maybe just wait for the market to come down before purchasing at all?

I would be in favor of buying a multifamily property and living in one unit. Then you can get your tenants to pay your mortgage for you and get started in buy and hold. As far as flipping goes, you can look for private money, hard money, seller financing or simply do wholesaling to start doing that as well. But for the FHA loan, I would definitely lean toward a fourplex.

@Tarquinn Curry what an interesting question and it's obvious that you've put a lot of thought and research into it already. A couple other options to consider that you didn't mention:

- don't use any of your money and partner with money partner on a flip. I've met/and interviewed people on my podcast who have done flips only with other people's money - one of them being @Stephen Akindona

- don't use any of your money and find a multifamily with a distressed owner. Arrange creative financing so that you move in and fix it up with very little down. This is going to VERY difficult to do BUT it is possible. I wouldn't wait for this to happen but I would at least try because it could happen. 

Your other two options are solid options as well but it sounds like they require you to use your entire allocated amount of 40k. I would try to use only half of that so you can do two deals by bringing in money partners. 

It depends on what the cash flow potential of the multi is. If you can buy it, live in one unit, and be cash flowing well each month + not having to pay rent, then that is how you would build up the liquidity for your next purchase.

If you wouldn't be cash flowing strongly, then it is not a property you should be buying anyway.

I just went through your current dilemma and decided not to go FHA route b/c I didn't want to pay the ~$7k fees associated with FHA programs. Since I'm looking at a short term live-in flip, I decided to go with a 3/1 ARM at 3% with 5% down. 5/1 ARM rates are also really good, just makes sure you sell or re-fi before the initial term expires. There's also a 203K program that allows you to borrow cash for improvements, but those programs take way longer to lock down (lender approvals, licensed contractor bids, etc...) and as you mentioned LA and surrounding areas are "sellers markets" so you need to be able to react quickly, once you find a potential property. Make sure your lender(s) understand your game-plan and also ask lots of questions.

IMO...limiting you target search area to where you want to live, will make it really hard to achieve your 7 year goal.  Perhaps start in your desired areas, buy right (most important factor) and then expand to other areas as you become more experienced and have #biggerpockets 

Great questions and solid advice, this is what I love about BP.  My two thoughts would be

- if your downpayment is going to wipe out most of your reserves be cautious and know your exit strategies (yes plural). Can you comfortable carry the debt and expenses if you have high vacancy? If your personal circumstances change for the worse would moving out and renting your personal unit provide enough cash to keep you going? If you go the SFH route, same questions apply, will it bring in any income? Can you rent a portion of it or all of it to cover costs?

- have someone more experienced vet your deal, do not rely on your real estate broker alone to give you sold  numbers on what your operating costs will be.

- Set aside reserves 3-6 months to cover debt/costs in an emergency.

- explore other loan options. FHA is not a first time buyer program, it is an owner occupier loan, and there are others with low down payments that may have less upfront costs. Different loans also have different PMI costs (FHA's tends to be high) which will impact your monthly payment. If you found a property that needs work, there are conventional renovation loans that will do 1-4 units and are easier and cheaper to close than 203k.

Good luck and keep us posted on what you decide.

@Tarquinn Curry

I purchased a multifamily last year with FHA and is not only for first time home buyer. I already had a few loans.

If your goal is passive income buy a multifamily. A single family is a personal residence and will not bring you any income unless you decide to rent individual rooms. The plan of waiting for the value to go up so you can refinance and buy a few more is more like a speculation than investing, is nice when it's happening but you can not build your entire plan around that. What if the property don't appreciate over the next few years, would you prefer to be stuck in a single family or multi that brings you income every month?

It's hard to find a good deal these days, but not impossible. Keep looking and if 40k is all you have to invest don't use all of it for down payment if you invest in multifamily, you will need reserves for maintenance and other unexpected expenses.

I would just affirm you are not under the gun to buy a plex with an FHA loan. They are not only offered to first-time buyers as @Ciprian L. points out.

Also, you would be crazy to take the risk of an ARM (adjustable rate mortgage) in this interest rate environment. Lock it in, regardless of your exit strategy! Where can rates go from here? Down?

Glad to have you here @Tarquinn Curry !  What real estate book are you reading?

Welcome to BP.

Agreed with @Ciprian L. here.

Buy Fourplex, you will live rent free as 3 units should cover your piti and other operating expenses.

As far as financing is concerned, go with FHA (3.5% down) and you will be in good shape. Going conventional will most likely require you to have 20 - 25% down.

Hope it helps.

A good agent should help you along the way here! 

2 quick tips that I have learned during my short time on BP which may be valid for you in this situation: 1) don't bet on appreciation and 2.) avoid analysis paralysis!

It's never going to be the perfect time to jump into the market as there'll always be uncertainties to some your numbers as best you can, get as much good advice as you can and avoid having tunnel vision when weighing up your options (theres always a way to get a deal done!) 

Best of luck!