Making the move from single family to multifamily - why do it?

12 Replies

I currently own 4 rental properties that are are single family. Three of them have long term leases and I do short term rental (airbnb/vrbo) on the 4th. I have spent countless hours researching the multifamily side and I'm looking for some advice on why multifamily seems to be the way to go. I am in the Nashville market so I think my view is a little skewed. One of my single family rentals doesn't produce monthly cash flow and I break even on it but the appreciation in just 3 years is unbelievable, much more so than I think if I would have went the multifamily route. I am thinking of selling this residence and making my first multifamily purchase. I am trying to make sense of the numbers. The same goes for my short term rental, it has produced great cash flow. Any scenarios or advice would be greatly appreciated on why multifamily wins out in the long run. Thanks so much!

Leanne

Originally posted by @Leanne Kreps :

I currently own 4 rental properties that are are single family. Three of them have long term leases and I do short term rental (airbnb/vrbo) on the 4th. I have spent countless hours researching the multifamily side and I'm looking for some advice on why multifamily seems to be the way to go. I am in the Nashville market so I think my view is a little skewed. One of my single family rentals doesn't produce monthly cash flow and I break even on it but the appreciation in just 3 years is unbelievable, much more so than I think if I would have went the multifamily route. I am thinking of selling this residence and making my first multifamily purchase. I am trying to make sense of the numbers. The same goes for my short term rental, it has produced great cash flow. Any scenarios or advice would be greatly appreciated on why multifamily wins out in the long run. Thanks so much!

Leanne

Hi Leanne, 

I am no expert in the matter, but my primary focus in getting 4 units vs 1 (for example) is economies of scale and cash flow

For example, here in Connecticut, one 30 square roof might cost 10K, but that doesn't necessarily mean that two 15 square roofs cost 5K a piece. There is a minimum cost to sending guys, equipment, material, etc. to a job site, so there really are savings if you can get more units under one roof. 

The cash flow thing is a bit more obvious, I think. You might be able to buy one SFR in your area for 300K, but I'd be willing to bet that you might be able to get 2 units (duplex) for that same price. The rents from the 2 units SHOULD be more than the rents from that one SFR.

If this isn't the case, I too would have a hard time understanding why folks go with MFRs. 

@Leanne Kreps

I have a nice portfolio of Multi family and single family in Memphis and I don't see myself buying anymore multi there. Tax rates are higher and tenants just have so many single family houses available quality tenants are tough to get. Besides I like the choices I have with single family, sell one if you need beer money and it won't destroy your whole investment goal. I just don't fit the BP model very well I guess but it works for the wife and I

Why do it? To take advantage of leverage perhaps, as it may be easier to get financing on a performing(commercial) asset, or aquiring a multitude of doors all at once,  or finding a value add play which can be very lucrative. Word of warning... sus out deals, make sure they are available in your area, before you go all in, multi is very hot now with pretty low cap rates ,especially in major markets

There are a few reasons I have gravitated to multi vs sfh.

  The biggest being, the ability to force appreciation.  If you can identify management flaws or building inefficienies and buy off of ACTUAL financials. There is a great deal of money to be made in this space. These properties are valued on noi and not comps. I closed sept 1 on a 22 unit complex...As is rents were 50-75 under market. I raised 17 of the 19 occupied 50-75. (2 were under a lease so they remained). The vacant 3 I renovated and raised 125. 2 more came open during this time so they also were renovated.  Just leased up number 5 last week. So in 45 days I have raised rents a little better than 1500 dollars a month.

I was able to reduce the house pwr bill by 40 a month switching all to l.e.d. I negotiated a better price for my trash,snow,and lawn care. Due to volume I also got a better rate for my insurance. Resulting in 3 k less expenses anually.

The total noi increase in 45 days, is better than 20k a year.. This increases the appraised value of the property by almost 200k. Working part time. (I have duplicated this process a few times)

Another is the lack of competition. There are far less multi buyers than sfh. The competition is also usually pretty sophisticated.. Meaning these properties usually only sell for what they are worth. No emotion just buisness.

This has been my experience. I hope it helps.

Peter

Michael Blank, podcast #66 guest on BP /  has own podcast as well that focuses on mf apartments.  He explains things really well.  It makes me want to skip doing any more Sf and just go mf.  

http://www.themichaelblank.com/podcasts/

This is one of those never ending arguments. There are pros and cons to both. I have had experienced investors with 20+ years tell me they would never touch multi family, and others tell me they would never touch single family.

The folks that don't like multi family say that it's because their turnover is "constant" and the expense ratio is "substantially higher". Tenants in single family homes tend to stay longer and typically, but not always, tend to be higher quality tenants. 

The investors that don't like single family say that it's because it's less expensive to replace 1 roof vs 4 roofs. Your property value isn't determined as much by market factors as it is by NOI. It's easier to manage 4 tenants at one location vs 4 tenants at 4 different locations.

In multi family properties that have say 10 units. If you lose 1 tenant, you are still 90% occupied. In a single family property, if you lose 1 tenant you are now 0% occupied. On the flip side, in a single family home you need 1 tenant to be 100% occupied and in your mutli family property you need 10 tenants to be 100% occupied. It's just a play on words!

I don't think there is a right or wrong answer. I personally like both.

A good deal is a good deal

Podcast Episode #227 touches on this "economy of scale" argument, as well as sfr vs mfr investing. Seems like it may be a good listen for you.

For me, it's simply size and scalability. I did 13 SFR's before I moved into multi-family. If done right, SFR's can be great investments, but you need a LOT to make a lot of money. The thing about SFR's is there is a line where they flip over to not profitable. For example, a $100k house can rent for $1,000/month. A $200k house in the same area, might rent for $1,500. A $500k house may rent for $2,500. You can do the math on that.

In my area, right around $125k is where the math starts to flip (less rent per $).  So the main reason I jumped into apartments is a $500k apartment can garner rent of a lot more than $2,500.  I own one that rents for $6k and one that rents for $10k (The $10k one I did buy at a discount and fix up, so it was more like $600k to be honest).  But again, you can see the math there.  Plus, it's not all or nothing on rent.  that $500k house goes vacant, it's $0 in rent.  A 10-unit has 2 vacancies and you still have 8 units of rent coming in.

Of course, when I had 13 SFR's, I did kind of look at it as a 13-unit complex in my mind (but the time involved is 4x a 13-unit complex because they aren't in the same place). I find I spend less time on an apartment than I would SFR's of the same unit count. I think it's easier to scale up more quickly to more units by going multi-family than staying with SFR's. That said, there are companies out there that own 1,000's of SFR's. It might work for them, but for me, MFR's are the way to go.

We've taken a slightly different approach. As most people have noted, your pool of buyers for SFRs is significantly greater than multi families. As a result, you typically have significantly greater swings in value for the sake that there is greater demand. 

As @Filipe Pereira mentioned, multis trade based on cash flow and less on individual desirability. As a result they have less significant swings because there isn't much sense to over pay for something that is supposed to produce appropriate cash flow. This is why you hear people say "I just can't find deals". 

We invested heavily in condos in 2010-2012 that have now appreciated by nearly 100% in value. The idea is to sell and either take the tax hit or 1031 the funds into the less significantly swinging multi units. It's been quite disheartening though as most properties are over valued even in multis. 

As a result, I suspect that we will hold, sell another condo or two and then aggressively buy again when we feel that properties are cash flowing better. There is some incentive to wait because property taxes aren't necessarily something you can change. We feel that if we can control that expense, we can focus on making upgrades and force appreciation.

Not sure if this answered your question much, but hopefully it gives you an idea or alternative exit strategies.

Hi @Leanne Kreps , check out my blog on why apartment syndication is an appealing investment vehicle. Although the blog is aimed at apartment syndication and it seems as though you're more interested in doing smaller multi-family deals yourself, I think it'll give you a solid foundation as to the advantages of multi-family in general.

https://www.biggerpockets.com/blogs/10191/66365-8-...

I was in the same boat. I was not going to hit my goals doing sfhs with a couple hundred of cashflow on each one with all that work.

What really made me make the switch to Mfh was the non recourse loans.

I can get a much better return with multi-family compared to single-family. My goal is cash-flow and I intend to eventually hand it over to someone else for management so the workload doesn't really concern me.

There are differences. MF tends to have lower-income, riskier tenants. There are more maintenance issues, complaints from tenants, lease violations, and turnover. You have more responsibilities concerning common areas, landscaping, parking lot painting, etc. You will generally get better appreciation with a SFH. However, you have more opportunities to increase value with MF by adding amenities like storage, laundry, etc.

I recently bought an 11-unit building for $350,000. I am netting over $2,000 monthly and haven't even finished renovating them or increasing the rent. If I get lucky, I could buy two single family homes for that same price and cash-flow $400 - $600. There's no comparison!

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