Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes
I would love your gut and honest opinion on this. $200k to invest. High risk tolerance. Single B/B- 8-10 unit apartment with a 7-9 cap rate OR 8 turn key properties (pick your market or markets).
I've bought and sold over 900 properties and have owned small apt building, as well as:
1. SFH
2. Duplexes
3. Townhouses
4. Condos
5. Farms
6. Timber land
7. Mixed use
8. Commercial
9. Subdivisions
10. Scattered vacant lots
I like apartments a lot, had one grossed about $750,000 in rent while i owned then sold it for 6x what I paid for it. But I can make a case for SFH also, some of the things i like about them:
1. Tenants pay all utilities, reduces expenses
2. Tenants mow lawn and shovel snow for free
3. Tenant bring their own appliances, reduces appliance repair and replacement budget
4. Tenants stay longer have had two 30 year tenants, plus 23, 21, 18, 17, 13, and a bunch of 12 year tenants.
5. Tenants take better care, and often think of house as theirs especially when they stay long term.
6. Tenants don't know each other.
7. Financing is better, lower interest rates, longer term fixed rates and smaller down payments.
8. Most people prefer detached single family housing over other options.
9. There is a lot more inventory of SFH to pick from when you buy.
10. When you sell SFH, most buyers (in my experience over 90%+) are owner occupants who pay retail market value for the property. Some times the buyer is the tenant who lived there for years, have sold several tenants who have been there 3-4 years, taking the house for along term test drive, then buying. Economies there selling to existing tenant, no painting, no clean up, no junk removal, and no real estate commission.
11. When selling MFH, buyer will almost always be an investor, who will likely hammer you down on price and terms, and will buy the property based on income generated. Owner occupant SFH buyers couldn't care less about income generation. And I've never had an owner occupant buyer for a MFH ever. I'm sure there is some outlier somewhere, but just like a unicorn, I've never seen one.
If I had $200,000, I'd buy SFH, 90% LTV, worth $2,000,000 scattered in good owner-occupied neighborhoods with good schools, low crime and near employment. I'd either buy Twenty $100,000 houses or Ten $200,000 houses or some mix of those.
I'm no pro, but I'm guessing your capital expenses and management will be less with the multi family.
Management should be less with the multifamily, but its very possible that it would be 8% in both scenarios.
Tough to say on capital expenses. "Turnkey" properties are generally fully and newly rehabbed. I would imagine apartments (at least those with vale add potential) would have deferred maintenance and CapEx.
To buy MF (5 units and above) the lender is typically going to look at the property for ~ 80% of the decision on whether to loan on the project. They will look at you for credit score and criminal background but for the most part it's based upon the properties ability to generate enough profit (NOI) to service the debt (principal and interest). You will need to have net worth = or greater to the loan amount and anywhere from 10-30% in post closing liquidity to qualify as well.
There is no DTI and it you can get non-recourse debt then the loans don't follow from property to property as you try to get additional loans.
Well, I would say if you can do a the multi close to home and the turnkey SFR at a distance, I'd go for the multi. However if it is a question of doing at a distance for either, than I would like be more interested in the turnkey SFR for diversity of risk and likely better cash flow returns.
@Andrey Y. If you've got a high-risk tolerance, go C/D MF. Big risk, big potential reward if purchased and managed properly - and if you're comfortable long distance fully managed I have a couple in mind, pm me.
If only based upon your 2 options, I'd go with the MF - less capex with a single roof, single exterior, etc. than going with 8 turnkeys @ who knows what class. But, of course it all depends on the details.
If I understand the post correctly, seems to be a few different decisions rolled into these options ... I will attempt to decompose them and offer my opinion:
Local vs Out of State: Local any day of the week ... you get full control over your investment and all the risk reducing and return boosting benefits of that. Even if you choose to turn your local stuff over to a PM, it is way easier to verify work, and fire them to resume control if needed. Same goes for realtors, same goes for contractors, etc.
SFR vs Commercial Multi-family: Dealers choice ... each have their pros and cons and depends on what you're looking for. In general I would say SFRs are higher quality, higher rent, attract more stable tenants (families), and generally more desirable to tenants as rentals (all other things equal) while multis will typically cash flow more. Sophistication of sellers and availability of supply are different. Financing is different. Buyers are also vastly different if/when you sell.
Turn Key vs Value add: Value add any day of the week. Forced appreciation equity bump scores a win in the short term and thus opens up multiple exit strategies, boosts returns, and lowers risk. Value add is usually not practical out of state, which is related to item 1. Only other reason I see for turn key is laziness.
@Andrey Y. If you've got a high-risk tolerance, go C/D MF. Big risk, big potential reward if purchased and managed properly - and if you're comfortable long distance fully managed I have a couple in mind, pm me.
If only based upon your 2 options, I'd go with the MF - less capex with a single roof, single exterior, etc. than going with 8 turnkeys @ who knows what class. But, of course it all depends on the details.
Most folks advise against investing long distance investing. I am not opposed to it, but I would hesitate to do if the purchase price is high. At least not without meeting all of the folks involved. I'll PM you.
Forgive me if I make any bad assumptions here- but I am going to read between the lines a little @Andrey Y.:
It sounds like you don't have a ton of experience, but did the homework. I've only been at this a couple of years so take this with a grain of salt (although my start is similar to what you are describing so that might add some credibility to counter it).
The dollar to dollar compare between the two makes them look and read like a good comparison. What I've experienced though is that it is WTF harder to find and execute on a good deal with a multi in that size. I read this term when I was first starting out- but can't remember who I got it from or I would give them credit... What you face is The Bigger Idiot Problem.
SFRs are easy to buy, turnkey, value add, somewhere in between- they are everywhere! The cities are lousy with them! If you handed me 200k and said go buy cash flowing properties I'd be out of money in a month. Mostly you are just buying from people and people decide they want to sell because they are moving or whatever- and they leave the house up until they get bored or hungry and then take an offer.
Multifamily stuff is harder. It is owned by an investor. (this is not 100% but the ratio is high) The investor is selling because A) it doesn't perform B) it is used up and has a lot of deferred maintenance C) they want to move to something better or D) they are in trouble and need the money for something else.
In scenarios A and B they need to find someone who is a Bigger Idiot than they are to buy the property. In C they are a shrewd investor, know the value, and aren't going to be maneuvered into giving you a penny of extra value. This is why (I think) in any given market the listed MF properties will all show the same CAP rate- if they want to sell the property they massage the asking price to be just higher than a bank will want to pay based on the income in that market. And in scenario D they are often either pissed off or desperate. And not the good kind of desperate. Its not "fire sale" desperation, but "if I don't cash this in big I am ****ed so I will ask too much and then hope"
THEN if you do get your multi family and its time to move on to something bigger- or you are in trouble and need the cash... You want to sell it, but who buys multifamily stuff? Other investors. And you need one that is A Bigger Idiot than you or they won't buy it!
Now this is OF COURSE not how it always works. There are shiny special deals and off market stuff and the famous Brandon Turner "the couple from church was just tired of dealing with it" type stuff- but those are the exceptions.
So back to your question... In a purely hypothetical scenario you, of course, go with the MF. But reality is a pain in the balls and swings the needle all over. So with that- I say go with SFRs.
I've bought and sold over 900 properties and have owned small apt building, as well as:
1. SFH
2. Duplexes
3. Townhouses
4. Condos
5. Farms
6. Timber land
7. Mixed use
8. Commercial
9. Subdivisions
10. Scattered vacant lots
I like apartments a lot, had one grossed about $750,000 in rent while i owned then sold it for 6x what I paid for it. But I can make a case for SFH also, some of the things i like about them:
1. Tenants pay all utilities, reduces expenses
2. Tenants mow lawn and shovel snow for free
3. Tenant bring their own appliances, reduces appliance repair and replacement budget
4. Tenants stay longer have had two 30 year tenants, plus 23, 21, 18, 17, 13, and a bunch of 12 year tenants.
5. Tenants take better care, and often think of house as theirs especially when they stay long term.
6. Tenants don't know each other.
7. Financing is better, lower interest rates, longer term fixed rates and smaller down payments.
8. Most people prefer detached single family housing over other options.
9. There is a lot more inventory of SFH to pick from when you buy.
10. When you sell SFH, most buyers (in my experience over 90%+) are owner occupants who pay retail market value for the property. Some times the buyer is the tenant who lived there for years, have sold several tenants who have been there 3-4 years, taking the house for along term test drive, then buying. Economies there selling to existing tenant, no painting, no clean up, no junk removal, and no real estate commission.
11. When selling MFH, buyer will almost always be an investor, who will likely hammer you down on price and terms, and will buy the property based on income generated. Owner occupant SFH buyers couldn't care less about income generation. And I've never had an owner occupant buyer for a MFH ever. I'm sure there is some outlier somewhere, but just like a unicorn, I've never seen one.
If I had $200,000, I'd buy SFH, 90% LTV, worth $2,000,000 scattered in good owner-occupied neighborhoods with good schools, low crime and near employment. I'd either buy Twenty $100,000 houses or Ten $200,000 houses or some mix of those.
@David Krulac Thank you for the feedback. I wasn't expecting the SFH answer. Maybe that is a testament to the MFH market being overzealous and saturated.
@Jackson Long I am surprised you would say MF is more of a pain than SF. If you are looking at per dollar of return or profit, a $1M building generating $2000/mo. of return on your cash takes almost the same amount of time to acquire as a $100k SFH generating $200 return per month.
@Andrey Y. Sorry it seems I was unclear. I am only referring to the acquisition. In the hypothetical MF looks nicer (and probably is once you have it) but dollar for dollar investing that money in MF is a much greater challenge.
Case and point- we are doing our current round of acquisitions in Memphis. Started in December. I would PREFER to invest this money in MFs. I've been in one semi serious discussion about a 70 unit and am in contract on a 5 unit. Otherwise the MF scene is too competitive or dead. Meanwhile I am in contract on 11 SFRs and had serious talks that wound up falling through on 17 others (two portfolios).
Perhaps a simile. I've got 10k to burn and I want a fast car. Should I buy a 60s musclecar and maybe beef it up a bit? Or buy an old Ferrari?
Well the Ferarri might be faster- but actually acquiring one is so problematic that it is difficult to compare the two plans.
We as BP investors are poker sharks! When we tour home games we normally just take people's lunch. Yeah there are other sharks- but they are easy to spot. That is SFR. But MF is the World Series of Poker. There are more sharks than you can shake a stick at. There are some donkeys too- but there are a lot of sharks competing for those donkeys.
I am a huge believer in win-win scenarios and creating value. I know my descriptions sound very adversarial. I think the reality of the circumstance IS adversarial- then within that framework you try to create value and win-win situations.
I don't think we should brow beat unsuspecting amateurs into doing things that are bad for them or anything like that.
Right now, the idea of dealing with 8 separate loans, contracts, and escrow sounds down right tedious.
That pretty much leaves MF or something interesting like agricultural investments paid in cash.
The amount of time I personally put in from start to finish purchasing a single turnkey property was a lot more than I thought. Not saying they will all be that way.
We have purchased SF to larger MF and now have 1750 units. There is no question that management fees will be less when you purchase larger MF properties…approx. half. The capital expenditure costs depend on the property you are purchasing. The one advantage for MF is you have one location so expenses will typically be less….also, if you are buying in volume, you will get a better price. If you have a large enough property, you will have full time employees in the office and maintenance. So, you can likely use the in-house maintenance team for some of the capex work and typically using in-house is much less expensive
I would agree with Jackson that MF is harder. I don’t think it is harder due to it being complicated…it is harder because as Jackson mentioned, you are buying from an investor and you are buying a business which will likely have more competition and a more educated seller.
It typically takes much longer to get a MF from beginning to close when compared to SF.
All in all, I would always choose MF over SF, but there is nothing wrong with SF.