Debating whether to buy multifamily or stick with single family

19 Replies

I hear a lot of podcast where people say multifamily is so much better than single family and for a while now it's been my goal to either buy a small apartment building or mobile home park.   My goal is cashflow to cover my living expenses and not long-term price appreciation.

  I've been investing in a market in the midwest where I can get houses for 30-35k that rent for 800-900 month.   In that same market the cheapest multifamily i can find is selling for 40k a unit (renting for $550) and most are higher.   I'm having trouble justifying paying more per unit to get a lower return.  Can anyone explain why i should be willing to pay more per unit for multifamily investments?

It sounds like youre finding pretty amazing single family homes. In your case, I think SFH's are fine and multi's are not worth it.

In other markets, its the flip.  You could be finding lets say duplex for 30k a unit and single families for 45-50k with similar rents per unit making the duplexes much better.

Thanks @Mark B. .   I didn't know if it was like that everywhere or if this market is different from most others.   I'm just starting to look at multi families and when I crunched the numbers was surprised at what I found.   

If you look at this strictly from a penciled cash flow perspective, you are correct. I don’t think that tells the whole story though.

Multifamily properties benefit from economies of scale. It’s easier to maintain and manage one building with multiple units opposed to several units spread across a market. You also have more upside for forcing appreciation and valuation, since those are functions of the NOI of the property. Lastly, it’s MUCH easier to go out and buy one 20 unit property rather than 20 SFHs.

SFHs are maintenance intensive, time consuming, and heavily dependent on the market. All that said, it’s still personal preference. If you have a plan to achieve your goals through SFHs, by all means that is what you should do.

I plan to have both SFH's and MFR's in my portfolio. There are aspects of both that I like.

For me it's more so about the deal and the cash flow than the property type.

It depends on the city and class of property. Multi family in C-D class areas of some cities are just to limited of a tenant pool to risk multi. Any decently qualified tenant will rent a single family leaving multi for the rest.

The choice will vary by your goals and your market.  There are markets where each is better than the other.  And some investors have goals and time limitations where purchasing tons of SFRs is not feasible.  Sounds like you have a good thing going (assuming those properties are in stable locations with a good tenant class).

@Billy Rogers After being a turnkey sfh owner for a while and now doing mfh here is what I tell folks. For those who are able to save more than $30k a year or have substantial liquidity (over 200k), being a landlord and especially flipping is a lot of work. If you like it cool... but just remember why we got into this... To be free from a JOB. Directly investing in a turnkey rental or small MFH is a good way to start to learn and build up the war chest to go into my scaleable investments such as private placement syndications. Whatever you do, try to be as close to the investment as possible. This is the fundamental problem I have with Wall Street who takes too much fees off the hard working efforts of the middle class.

There’s aspects to both that are beneficial. Personally I plan to stick with single family for the initial start because they’re easier to manage, keep rented and financing is cheaper and easier to get.

Once I get a good base, I’ll start scaling up into multifamily through partnerships and on my own.

As others have stated the biggest advantage is the ability to force appreciation through increasing noi. The second would be scale.

So In multi you have to dig a little deeper than just price per unit and rent per unit.  You need to look for management inefficiencies. Can you improve occupency? Can you reduce expenses? Can you bump up rents as is? Can you make a cosmetic upgrades to units and get higher rents and improved occupency? Look for these improvements. Also verify the owners provided expenses. Most of the buildings I have looked at, it is either a "if you do this" performa or a total bs cost spread sheet. So verify and demand ACTUAL financials. 

I'm not gonna get into a debate of which one is better.. Multi got me to my goals... So I prefer multi..

Peter

We do a lot of single family and make it work. We've found that in our market, it's easier to find good deals with SFR, but we still buy multifamily too. It's not necessarily an either/or proposition.

I wouldn't focus so much on the price per unit. In multi's you need to look at the cap rates and decide if the asset is producing enough NOI to meet your needs. Also, as mentioned above, is there an opportunity to force appreciation by increasing rents, improving operating efficiency or reducing vacancy, for example.

You hear a lot of people talking about it being ok to buy a 4 cap if they can improve it to a 6 cap through these kinds of improvements.

Also, keep in mind that multi is hot right now, so there is a lot of cash out looking for deals which is why prices are up and cap rates are down in most areas.

One last thought. There are economies of scale having a bunch of units under one roof, however, a group of 20 SFR's more or less looks like a 20 unit multi in how you operate it.

Good luck.

I tend to shy away from multi-family for a single reason - exit strategy.

I could be 100% incorrect, but in my view, when you have a multi-family unit, and you go to sell it, you're going to have to market it to another investor.  I don't know of a single investor out there that wants to pay full price (aside from folks that buy turn-key).

My preference is to have the ability to sell the home to a much broader market - both individuals and investors when it's time.

Originally posted by @Ed E. :

I tend to shy away from multi-family for a single reason - exit strategy.

I could be 100% incorrect, but in my view, when you have a multi-family unit, and you go to sell it, you're going to have to market it to another investor.  I don't know of a single investor out there that wants to pay full price (aside from folks that buy turn-key).

My preference is to have the ability to sell the home to a much broader market - both individuals and investors when it's time.

I am in agreement with you. My single family homes can be sold to a first time home buyer or investor, so my sales market is huge. A first time home buyer can buy one of my homes with 3% down or even nothing down using the right government programs. 

It's not a blanket determination that MFRs are always better than SFRs. It happens to be, oftentimes, that MFRs earn higher returns than SFRs and that's why people tend to lean towards them. MFRs typically have higher risk factors, so one should usually see a higher return on them in order to invest in them...over SFRs. 

In your case, in the market you are in, that's not the case. Since SFRs are typically less risky, and in your case they have higher returns, it seems super obvious to me to stick with SFRs. The general rule of thumb you are talking about, that MFRs are better, isn't applicable in your case.

I think going big in MF is where you really start seeing the difference (professional mgt, scale, forced appreciation, accelerated depreciation).  Must go value add and when you fix it up, there are plenty of buyers (REITs, family offices, overseas wealthy buyers that want nothing to do w/fixing up property but everything to do with a property that is stabilized, free of worry and cash flows at a nice yield).  In the last downturn, MF delinquency on mortgages was 1% and SF properties was 4-5% nationwide.  They have better staying power in downturns.

https://www.biggerpockets.com/blogs/9145/53820-why...

Originally posted by @Ed E. :

I tend to shy away from multi-family for a single reason - exit strategy.

I could be 100% incorrect, but in my view, when you have a multi-family unit, and you go to sell it, you're going to have to market it to another investor.  I don't know of a single investor out there that wants to pay full price (aside from folks that buy turn-key).

My preference is to have the ability to sell the home to a much broader market - both individuals and investors when it's time.

There was just a thread on this subject. There are a ton of people looking to buy turn key multi-family.  

Both can be great. To me it's about power in numbers and efficiency. If you can buy a $10mm deal and increase the value by 10% then you just made $1mm. Of course you can buy $10mm worth of SF's as well and the same rule holds true, but it will take years to buy that many SF's at $50k/house, but 1 deal can get you $10mm apartment. 

Single family vacancy zero income to pay mortgage

4 plea with 50% vacancy still can pay the mortgage

Duplexes in some areas can carry the mortgage at half occupancy 

It is six, half dozen and another 

Tougher  exit strategy with Multi

More SF available.  

More buyers for SF

Originally posted by @Billy Rogers :

I hear a lot of podcast where people say multifamily is so much better than single family and for a while now it's been my goal to either buy a small apartment building or mobile home park.   My goal is cashflow to cover my living expenses and not long-term price appreciation.

  I've been investing in a market in the midwest where I can get houses for 30-35k that rent for 800-900 month.   In that same market the cheapest multifamily i can find is selling for 40k a unit (renting for $550) and most are higher.   I'm having trouble justifying paying more per unit to get a lower return.  Can anyone explain why i should be willing to pay more per unit for multifamily investments?

That is the debate for the ages. Some say MFRs are better due to the whole vacancy thing. Others say SFRs are where its at due to the extra expenses that owner's need to worry about. With MFRs, owners need to pay for and manage the snow removal, grass cutting, water overages, etc. Of course, a good PM would take care of this, but you'd still be paying for it.

Try looking at:

Single Family vs. Multi-Family Investments

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Join the Largest Real Estate Investing Community

Basic membership is free, forever.