Would you rather buy a SFR, Duplex, Quad or 10+ unit....Why?
Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
Simple question. What do you prefer investing in & WHY?
Simple question. What do you prefer investing in & WHY?
50+ unit apartment buildings. Why?
Now they are harder to sell - but that also makes them easier to buy specially when you have a motivated seller on the other end. You can do more creative acquisiton techniques (seller carry back financing, deferred maintenance credits, etc) which lead to no money-down opportunities.
@James Wise what @Michael Ealy said, hands down! I would start with your goals, what is it you are trying to accomplish and how quickly. Compare and contrast all the vehicles you can use and see which one works best for your goals.
I know it was not brought up and I do invest in SFR and multi fam but condos can be a great score for long term hold also. We have a few that really do well. Finding the right deal on one with a low monthly HOA makes for an easy low maintenance rental with not alot of extra expenses. I used to think the HOA would kill my profit but considering its paying for all WSG and maintaining grounds, all exterior maintenance and a pool and a hot tub and workout facility and a club house. The HOA fee is nothing compared to what I would be paying on a SFR or multi fam unit that I had to cover WSG and all exterior maintenance. Plus you have a more desirable product with the pools and facilities that are usually included.
Multi-units all day to help off set any potential vacancy. Numbers change more drastically with vacancy for SFR versus multi-units. In the locations I have a microscope on the Utah (Salt Lake/Utah County) markets and with the numbers, (cap rate and cash flow), that I've penciled they look a lot better with multi-unit. I'm assuming other areas might be the same but not positive. I love 2-4 units, new construction if you can find the right deal and/or have the right builder connections. And the financing terms are great with 1-4 units.
@James Wise
Depending on the market and what you can afford. In San Diego the ghetto area single family is 500k and decent area single family is 750-800k. So here single family doesn't make much sense for investment as rental. But the key is to invest where it make sense and live where you want to live. If you are not doing syndication or having family and friends investors, what you can buy have a limit. Your income, your ability on down payment, rehab cost, reserve saving, credit, etc. so base on where you are in your REI stage, you look at areas that meets your investing goal and invest there. If you are newer, investing within your backyard will give you a sense of control. However, if the number doesn't make sense you have to look somewhere else. Some would argue economic of scale, I do agree to some degree, but we do have sfr from far away that we make great cash flow without being there and those are some of our initial investments. The most risky part of you investing in distance is the lack of knowledge, you can build a system around it if you know the how and what. So if you invest in distance given that it is a good deal the most it would cost you is your time but this is part of learning.
The economics of scale for cash flow is undeniable. Those investing in SFHs do not have the same business goal as income investors. They may think they do but obviously with higher expenses and higher risk per door/roof it is not the case.
It does not make good business scenes for me to have 30 tenants with 30 roofs at a higher price per door when I can have 30 tenants with only one roof at a lower price per door. One building is far easier to manage than 30.
@James Wise Buy everything...
Now that's a strategy I can get behind. Well done sir.....Well done.
My answer at this point in time is single family homes.
1. Easy entry IMO
2. More supply in the market.
3. Having the choice on managing the properties myself or having the option of hiring out.
As time goes by my goal is to get into large multi family but everybodies answer will be different based on where they are in their lives. Good question and best of luck!
@James Wise
How many do you have in the ole' portfolio so far Anthony?
@James Wise I understand the process and know what to expect as far as analysis, lending, contract, etc....
I get anxiety outside of my comfort zone, so knowing what to expect is a plus for me.
Makes sense. The lending is the biggest shift when you move up into the bigger deals....A lot of investors have a hard time swallowing the new terms available to them. They were spoiled with all those easy 30 year loans.
@James Wise I'm working on structuring my first 10+ unit now.
More money in one place less risk if something goes in the building there is money coming in to cover it like boiler or roof.
Great cash flow potential I can get to my financial freedom goals fast with the same amount of effort over a period if time.
No huge loss of capital gains tax like there is with doing flips. Easier to leverage when your looking to scale up.
You can sometimes purchase them at the same price if a single family home but most likely will need a bunch of work but once done huge equity and cash flow.
The list goes on.
Just a sold investment with huge upside.
Good point that I haven't seen brought up yet. While the terms aren't as attractive as those 30 residential terms the amount of capital the bank will lend you is rather unlimited.......Not agreeing with you on the cost of an apartment building being the same as a single family house though.
I invest in two types of product: Single family rental houses and apartment buildings over 10 units.
Single Family houses: I was into this product in a small way (4 houses) before the crash. I noticed a few things. The demand for that rental was huge. I'd be able to get more candidates and screen for good tenants that could stay long term. I pushed grass and snow maintenance onto the tenant. Next, when the real estate crash came, the prices of single family houses were severely discounted, much more so than apartment buildings. So it was opportunistic. They are fabulous investments but investors need to know that the maintenance and turnover costs are high. A negative is that they are difficult to sell as rental houses.
Apartment Buildings: There are a few good things. The first is ability to scale. You can become a full time landlord much quicker by buying multi-family. There are lots of economy of scale, including centralized locations which save you time. The demand to rent and tenant base is not strong as the houses, unless you're in A areas. The big downside to apartments is the pricing. Right now, it is oversubscribed. I've been thinking that prices are at a peak and there are too many headwinds to purchase at market prices today. Others on this post mentioned there are challenges in selling apartment buildings, but in my market the demand and disposition path is very defined.
Other product: I don't like 2 flats (duplexes) because they are small buildings that behave like apartment buildings. I don't get the high tenant demand characteristics of houses, but I do get the scattered site headaches. My market, Chicago, has a higher percentage of this type of product. It is more rare in the suburbs.
Six units are ok, but I'd rather focus on slightly bigger buildings if possible.
Apartments for scale.
The argument of preferring multifamily due to lower vacancy uses false comparisons. Assuming single family and multifamily have vacancy occur at the same rate, then you will have equal vacancy in each. The difference with multifamily is just MORE vacancy. Less of the property is vacant at any given time, but more units are vacant.
Follow the numbers, over 7 years let's assume the vacancy rate is 2 months per unit.
(1) Single family has 2 months of vacancy
(1) 100 unit Multifamily has 200 months of vacancy
It is true that when the single family property is vacant, it is 100% vacant, but the vacancy occurs more often in the multifamily property. This example is kind of silly, because in real life nobody would compare purchasing (1) Single Family against an apartment building. So this is more realistic:
(1) Single family has 2 months of vacancy
(1) Duplex has 4 months of vacancy (1/2 property)
In this example you have twice the number of tenant turn overs and SAME overall vacancy. The only difference is the single family is 100% vacant versus duplex is 50% vacant, but the duplex vacancy happens twice as often so total vacancy is the SAME.
No question, larger multi families have economies of scale, just like owning 100 single families have economies of scale.
Easy Choice for me:
SFH (For Flips):
MFH (3-20 units, Long Term Holds)
The argument of preferring multifamily due to lower vacancy uses false comparisons. Assuming single family and multifamily have vacancy occur at the same rate, then you will have equal vacancy in each. The difference with multifamily is just MORE vacancy. Less of the property is vacant at any given time, but more units are vacant.
Follow the numbers, over 7 years let's assume the vacancy rate is 2 months per unit.
(1) Single family has 2 months of vacancy
(1) 100 unit Multifamily has 200 months of vacancy
It is true that when the single family property is vacant, it is 100% vacant, but the vacancy occurs more often in the multifamily property. This example is kind of silly, because in real life nobody would compare purchasing (1) Single Family against an apartment building. So this is more realistic:
(1) Single family has 2 months of vacancy
(1) Duplex has 4 months of vacancy (1/2 property)
In this example you have twice the number of tenant turn overs and SAME overall vacancy. The only difference is the single family is 100% vacant versus duplex is 50% vacant, but the duplex vacancy happens twice as often so total vacancy is the SAME.
No question, larger multi families have economies of scale, just like owning 100 single families have economies of scale.
In my market the multi-unit have a higher vacancy rate than SFR and I have found this especially true for my units. My SFR have a virtual 0% vacancy rate. Most of my detached units have never turned over. My multi-units have around 2% vacancy rate. I suspect many/most markets have lower vacancy rate for SFR than multifamily.
So as you point out, equivalent vacancy rates implies same amount of vacancy. What I add is that, in my market, SFR do not have close to the turn over as multifamily so in reality the SFR have a lower vacancy rate.
Still my vote would be for a 50+ unit. I have 0 50+ units but have contemplated the attractiveness of the increased passiveness that could be achieved by an on-site competent PM. Add in the scalability and it is were I want to be going.
However, I am actively looking in my comfort zone (duplex to quad, include SFR that is good candidate for ADU) but I want to scale to 50+ unit apartments.
@James Wise
Multifamily is better. You could have 10 units and one loan. With SFR you would have 10 loans, 10 locations, and much more logistics and management pain than if it was all in one deal, as a Multifamily. Go big!
I like SFH if they have no mortgage or the loan to value is max 50%, this makes them very secure even in the worst market. That being said Large multi family is the best!!!!!!!. The false premise that is being pushed here and other conversations is that large units are hard to sell. Amateur response to say this about large Multi familyI have never sold anything that makes money that has been hard to sell no mater the size. So yes if you have a dog of a property thats right but lets not forget the money is made on the buying end, make a bad buy then you are there hard to sell property.
thank you for reading and engaging
@James Wise
Multifamily is better. You could have 10 units and one loan. With SFR you would have 10 loans, 10 locations, and much more logistics and management pain than if it was all in one deal, as a Multifamily. Go big!
Exactly!
I pass on SFR's all the time because of this.
It's more of a logistical and management nightmare when handling a lot of single families. Yes I know you can technically put systems in place to accommodate that, but it will always cost more and be more of a headache than slightly larger MFs.
If you ever hire a PM, their prices will always be higher for a 50 unit single family portfolio vs 5 10 unit buildings. Also Capex and repairs isn't properly calculated by many SF investors. Capex # is usually substantially higher.
Also it is much cheaper to repair a unit than it is for a SFH. SFH are usually larger. If you are dealing with Class C/D neighborhoods, 1 bad tenant who vandalizes the SFH can ruin your year. In a MF, that is much harder to do.
I like duplexes. Duplexes allow tenants to have a yard space for their dogs and kids as well as covered parking. Fourplexes are another animal altogether. There are more people close together, usually only a patio or tiny yard on the ground floor and a balcony up, no covered parking, more turnover.
With a duplex, you rarely if ever would have both sides vacant at the same time. This allows you to cover your mortgage (or most of it) even with a vacancy.
The argument of preferring multifamily due to lower vacancy uses false comparisons. Assuming single family and multifamily have vacancy occur at the same rate, then you will have equal vacancy in each. The difference with multifamily is just MORE vacancy. Less of the property is vacant at any given time, but more units are vacant.
Follow the numbers, over 7 years let's assume the vacancy rate is 2 months per unit.
(1) Single family has 2 months of vacancy
(1) 100 unit Multifamily has 200 months of vacancy
It is true that when the single family property is vacant, it is 100% vacant, but the vacancy occurs more often in the multifamily property. This example is kind of silly, because in real life nobody would compare purchasing (1) Single Family against an apartment building. So this is more realistic:
(1) Single family has 2 months of vacancy
(1) Duplex has 4 months of vacancy (1/2 property)
In this example you have twice the number of tenant turn overs and SAME overall vacancy. The only difference is the single family is 100% vacant versus duplex is 50% vacant, but the duplex vacancy happens twice as often so total vacancy is the SAME.
No question, larger multi families have economies of scale, just like owning 100 single families have economies of scale.
In my market the multi-unit have a higher vacancy rate than SFR and I have found this especially true for my units. My SFR have a virtual 0% vacancy rate. Most of my detached units have never turned over. My multi-units have around 2% vacancy rate. I suspect many/most markets have lower vacancy rate for SFR than multifamily.
So as you point out, equivalent vacancy rates implies same amount of vacancy. What I add is that, in my market, SFR do not have close to the turn over as multifamily so in reality the SFR have a lower vacancy rate.
Still my vote would be for a 50+ unit. I have 0 50+ units but have contemplated the attractiveness of the increased passiveness that could be achieved by an on-site competent PM. Add in the scalability and it is were I want to be going.
However, I am actively looking in my comfort zone (duplex to quad, include SFR that is good candidate for ADU) but I want to scale to 50+ unit apartments.
I agree. I owned small multifamily and I have houses. I sold my small multi because of the vacancy/turnover. My single family have near zero vacancy. I like the scale of apartments, but really until 50 units there isn't enough scale to make it beneficial. Duplex and triplex don't have scale and the shared walls make them less desirable.
The argument of preferring multifamily due to lower vacancy uses false comparisons. Assuming single family and multifamily have vacancy occur at the same rate, then you will have equal vacancy in each. The difference with multifamily is just MORE vacancy. Less of the property is vacant at any given time, but more units are vacant.
Follow the numbers, over 7 years let's assume the vacancy rate is 2 months per unit.
(1) Single family has 2 months of vacancy
(1) 100 unit Multifamily has 200 months of vacancy
It is true that when the single family property is vacant, it is 100% vacant, but the vacancy occurs more often in the multifamily property. This example is kind of silly, because in real life nobody would compare purchasing (1) Single Family against an apartment building. So this is more realistic:
(1) Single family has 2 months of vacancy
(1) Duplex has 4 months of vacancy (1/2 property)
In this example you have twice the number of tenant turn overs and SAME overall vacancy. The only difference is the single family is 100% vacant versus duplex is 50% vacant, but the duplex vacancy happens twice as often so total vacancy is the SAME.
No question, larger multi families have economies of scale, just like owning 100 single families have economies of scale.
In my market the multi-unit have a higher vacancy rate than SFR and I have found this especially true for my units. My SFR have a virtual 0% vacancy rate. Most of my detached units have never turned over. My multi-units have around 2% vacancy rate. I suspect many/most markets have lower vacancy rate for SFR than multifamily.
So as you point out, equivalent vacancy rates implies same amount of vacancy. What I add is that, in my market, SFR do not have close to the turn over as multifamily so in reality the SFR have a lower vacancy rate.
Still my vote would be for a 50+ unit. I have 0 50+ units but have contemplated the attractiveness of the increased passiveness that could be achieved by an on-site competent PM. Add in the scalability and it is were I want to be going.
However, I am actively looking in my comfort zone (duplex to quad, include SFR that is good candidate for ADU) but I want to scale to 50+ unit apartments.
I agree. I owned small multifamily and I have houses. I sold my small multi because of the vacancy/turnover. My single family have near zero vacancy. I like the scale of apartments, but really until 50 units there isn't enough scale to make it beneficial. Duplex and triplex don't have scale and the shared walls make them less desirable.
This is very market dependent. Ive had very very low vacancy in all the small MF I've owned. I do agree SFH have usually lower vacancy because there are less rental supply, in most places. Vacancy comparisons also aren't too fair, since management itself causes a lot of vacancy (increasing rents too aggressively; etc).
And there is scale below 50 units. Capex is lower than SFH's. Maintaining 20 houses costs more than maintain 5 4 unit buildings. PM costs are lower, Logistics are easier, etc.
I invest in two types of product: Single family rental houses and apartment buildings over 10 units.
Single Family houses: I was into this product in a small way (4 houses) before the crash. I noticed a few things. The demand for that rental was huge. I'd be able to get more candidates and screen for good tenants that could stay long term. I pushed grass and snow maintenance onto the tenant. Next, when the real estate crash came, the prices of single family houses were severely discounted, much more so than apartment buildings. So it was opportunistic. They are fabulous investments but investors need to know that the maintenance and turnover costs are high. A negative is that they are difficult to sell as rental houses.
Apartment Buildings: There are a few good things. The first is ability to scale. You can become a full time landlord much quicker by buying multi-family. There are lots of economy of scale, including centralized locations which save you time. The demand to rent and tenant base is not strong as the houses, unless you're in A areas. The big downside to apartments is the pricing. Right now, it is oversubscribed. I've been thinking that prices are at a peak and there are too many headwinds to purchase at market prices today. Others on this post mentioned there are challenges in selling apartment buildings, but in my market the demand and disposition path is very defined.
Other product: I don't like 2 flats (duplexes) because they are small buildings that behave like apartment buildings. I don't get the high tenant demand characteristics of houses, but I do get the scattered site headaches. My market, Chicago, has a higher percentage of this type of product. It is more rare in the suburbs.
Six units are ok, but I'd rather focus on slightly bigger buildings if possible.
Some good nuggets of info in there. Myself I like the 2-4 unit space when investors are getting going. Those 30 years loans are very attractive. I don't advocate 1 investor go after more than 10 of these though. At that point one should move to the big dawg deals.
The argument of preferring multifamily due to lower vacancy uses false comparisons. Assuming single family and multifamily have vacancy occur at the same rate, then you will have equal vacancy in each. The difference with multifamily is just MORE vacancy. Less of the property is vacant at any given time, but more units are vacant.
Follow the numbers, over 7 years let's assume the vacancy rate is 2 months per unit.
(1) Single family has 2 months of vacancy
(1) 100 unit Multifamily has 200 months of vacancy
It is true that when the single family property is vacant, it is 100% vacant, but the vacancy occurs more often in the multifamily property. This example is kind of silly, because in real life nobody would compare purchasing (1) Single Family against an apartment building. So this is more realistic:
(1) Single family has 2 months of vacancy
(1) Duplex has 4 months of vacancy (1/2 property)
In this example you have twice the number of tenant turn overs and SAME overall vacancy. The only difference is the single family is 100% vacant versus duplex is 50% vacant, but the duplex vacancy happens twice as often so total vacancy is the SAME.
No question, larger multi families have economies of scale, just like owning 100 single families have economies of scale.
In my market the multi-unit have a higher vacancy rate than SFR and I have found this especially true for my units. My SFR have a virtual 0% vacancy rate. Most of my detached units have never turned over. My multi-units have around 2% vacancy rate. I suspect many/most markets have lower vacancy rate for SFR than multifamily.
So as you point out, equivalent vacancy rates implies same amount of vacancy. What I add is that, in my market, SFR do not have close to the turn over as multifamily so in reality the SFR have a lower vacancy rate.
Still my vote would be for a 50+ unit. I have 0 50+ units but have contemplated the attractiveness of the increased passiveness that could be achieved by an on-site competent PM. Add in the scalability and it is were I want to be going.
However, I am actively looking in my comfort zone (duplex to quad, include SFR that is good candidate for ADU) but I want to scale to 50+ unit apartments.
I agree. I owned small multifamily and I have houses. I sold my small multi because of the vacancy/turnover. My single family have near zero vacancy. I like the scale of apartments, but really until 50 units there isn't enough scale to make it beneficial. Duplex and triplex don't have scale and the shared walls make them less desirable.
This is very market dependent. Ive had very very low vacancy in all the small MF I've owned. I do agree SFH have usually lower vacancy because there are less rental supply, in most places. Vacancy comparisons also aren't too fair, since management itself causes a lot of vacancy (increasing rents too aggressively; etc).
And there is scale below 50 units. Capex is lower than SFH's. Maintaining 20 houses costs more than maintain 5 4 unit buildings. PM costs are lower, Logistics are easier, etc.
I agree it is market dependent. Many of the 4-plex in my area have rents in the $600-650 per unit range. For those the landlord pays gas, garbage, water, snow, lawn and commons area electric. So you get very high operating costs. Plus you get tenant drama.. Someone is walking too loud, dog is barking, smoking near the door, loud music, the list goes on. With single family the tenant pays all expenses and there is nobody to complain about. The problem with 4 plex is there isn't that much scale, not enough for onsite services. When you jump to 50 you can get onsite leasing and maintenance. The same things go wrong with houses as with a four plex; furnace, AC, appliances, plumbing. There isn't much economy of scale in a four plex because it is only four units. It is not like all four units will have problems at the same time, so you are still stuck driving between properties.
I am not speaking absolute here. I realize every market is different. I just decided to stop chasing problems at these small multi unit properties. I like having less doors and less problems.
So i am a big data guy. i want hard data on anything i do. So just one thing i want to share here an article/ study i found about multifamily properties in new york city during the crash.
https://furmancenter.org/files/sotc/Multifamily_Re...
i was an agent in new york city ( got to reinstate that license...) and if there was one place that should have been just fine in the rental market during a crash, that was the place.
yes cap rates increased during the crash, yes they were low at the start, but still would you have guessed that 20-99 unit buildings were the biggest failures of their area? probably not. and look at the 5-19 unit properties! a relatively low up tick in foreclosure especially compared to the 20-99 unit buildings.
if some one has some data on why this occurred that i have yet to see by all means share.
This all meant to be food for thought. not a definitive proof f one thing or another
What i take from this is similar to my thoughts on flipping. You either take on small flip , easy to manage and can be finished very quick, or you go all out with a new build home done really well. Going the middle road doesn't work so well it seems. it didn't work for Goldilocks int the end either ;)
If the numbers made sense I would love to eventually own the Apartment Building with 10+ units. Seems like it would be easier to sell after I was done cash flowing like crazy as someone is buying the entire business. I also think it would reduce work by having all the units in one place.