Simple question. What do you prefer investing in & WHY?
Single Family Houses
Duplexes
Quads
Apartment buildings (10+ units)
50+ unit apartment buildings. Why?
Economies of scale which leads to lower cost per unit for almost everything (maintenance & repairs, capex, property management, etc)
Little income improvements through more efficient management leads to HUGE increase in equity.
You have on-site management and maintenance since the property can afford it - so it becomes more passive (notice I didn't say totally passive because it's not)
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.
Developer · Rochester, NY · Member since 2016 · 406 posts · 339 votes
7y
@Michael Ealy I totally agree but 75+ units (ideally 150+ units) seem to be sweet spot for us. I have a portfolio of 2-6 unit buildings spread throughout my city and the scale is just not good for operations or cost.
Rule of thumb is that you want one maintenance person and one property management person per 75 to 100 units. Having all of your units on one place is ideal for operational and Maintenance costs. I wish someone taught me this 13 years ago!
Developer · Rochester, NY · Member since 2016 · 406 posts · 339 votes
7y
@Michael Ealy and also financing is so much easier on larger deals. You can get interest rates almost a full point less than portfolio lenders because larger deals qualify for agency debt (Fannie freddie). Also you can get amortizations of 30 years instead of 20 or 25 years. And also you can sometimes get interest only for 5 years on value add apartment deals. And also non recourse (easier for raising money from passive investors). And and and!!!!
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.
Makes sense in your market to stick to large MF or SFH than.
In my markets a 4 Plex with rent for $800-$1100/unit. Yes we pay for water/sewer/garbage/common electric(minimal cost in small MF)/, but it still is a much higher yield than the single families. Cost per unit is lower as well.
I understand onsite leasing and maintenance is much simpler. But managing 20 apartments over 4 buildings is easier than managing 20 sfh's. Theres only 4 roofs to worry about. 4 main lines; etc etc. Still less driving between properties, you only have 4 locations to go to vs 20. Usually I go to a property with more than just one thing to take care of.
I'll def grow to larger buildings as well, but larger buildings also have more competition in most markets and attract more professional investors that drive yield down.
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.
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 ;)
20-99 unit properties were most likely "professional" investors on commercial debt that couldn't refi because liquidity dried up. These guys use high leverage, mezz loans, and bridge loans that required a mark to market game place for their investment to work. They would have had to deleverage to keep their properties from being foreclosed, which wasn't possible because most of their investor money also dried up.
5-19 units were more mom & pops and local long term investors. Families that own a bunch of buildings for 15+ years. They are traditionally much lower leverage.
@Michael Ealy and also financing is so much easier on larger deals. You can get interest rates almost a full point less than portfolio lenders because larger deals qualify for agency debt (Fannie freddie). Also you can get amortizations of 30 years instead of 20 or 25 years. And also you can sometimes get interest only for 5 years on value add apartment deals. And also non recourse (easier for raising money from passive investors). And and and!!!!
What type of portfolio are you working with now Matt? What's the mix of holdings look like for you now?
Developer · Rochester, NY · Member since 2016 · 406 posts · 339 votes
7y
@James Wise 96 units of mixed use, commercial office and residential Multifamily. I’ve been focusing on acquiring only properties which gross a minimum $100k per year.
@James Wise 96 units of mixed use, commercial office and residential Multifamily. I’ve been focusing on acquiring only properties which gross a minimum $100k per year.
Do you have anything in the 75+ unit range? Looking for your experiences & info on the performance of what you are already in ownership of.
Shoot over your email in a DM and i'll put a reminder in my calendar for this time next year to let you know how im going in this space. If im still going strong and have some deals under my belt we could look into a cameo in your videos?
SFH w/ a niche. I have to have a 2 car garage, min 1750 sqft, under 30yrs, I weighed top school districts. Look at avg sell price/sqft ratio. Then I take a minus $10 as my discount. Bigger markets im looking for bigger discount. Then the investor in me applies the 1% rule.
Also being a Veteran is huge.. If you get 100% va disability or KNOW somone that does. After 1st yr they cam apply to have property taxes wave/exempt. In NC there is a tax exemption on the 1st 45k ... They shot down the 100k tax emption. The bill didnt. Pass NC Legislature
Shoot over your email in a DM and i'll put a reminder in my calendar for this time next year to let you know how im going in this space. If im still going strong and have some deals under my belt we could look into a cameo in your videos?
🤣 Lol love it. You've got a deal my man. Email is in the signature line.
Investor · San Diego, CA · Member since 2016 · 265 posts · 305 votes
7y
James Wise
200+ unit complexes
There is something to be said for the limited partner invested in syndicated deals of 200+ units. Passive income with efficiency and shared tax benefits. With one or two good operators that you know, like and trust, you can be diversified in multiple markets.
There is something to be said for the limited partner invested in syndicated deals of 200+ units. Passive income with efficiency and shared tax benefits. With one or two good operators that you know, like and trust, you can be diversified in multiple markets.
How many of these are you invested in? Are you on the operator or investor side?
Investor · San Diego, CA · Member since 2016 · 265 posts · 305 votes
7y
James Wise
I’m in a few deals as an LP and looking to do more this year. One of the operators I’m looking into this year has averaged a 32% annualized return for their investors over their last 16 deals. They have an interesting model. I can share more if you want to send me a DM.
I’m in a few deals as an LP and looking to do more this year. One of the operators I’m looking into this year has averaged a 32% annualized return for their investors over their last 16 deals. They have an interesting model. I can share more if you want to send me a DM.
32% return sounds a bit fishy my man, too good to be true so to speak. Spill the deets.
Investor · San Diego, CA · Member since 2016 · 265 posts · 305 votes
7y
James Wise
In my experiences, you can easily achieve 10% annualized return as a debt investor in a syndication deal. With LP equity share in a syndication deal, 10% return gets a bronze medal; 15% return gets a silver and 20%+ gets a gold medal. There are plenty of deals out there right now that one can participate in to achieve any of these returns mentioned.
Now 32% return sounds a little high-reaching, doesn’t it?
I’m still doing my due diligence by the way, but here is what I understand of this operator’s model. They use supplemental financing at the core of their strategy and, their pro formas show target returns up to 20%. They return investor capital in phases: 50% by year 2, 75% by year 3 and 100% by year 4. With an equity share as an investor, you stay in the deal thru year 4, 5, 6, etc until the property is sold. Beyond year 4, your return is technically infinite because you received all of your initial capital back to redeploy into another deal that could return another 20%+.
This operator has a track record (60+ multi-family deals) and is taking on a new deal every 5 - 7 weeks to feed the machine. So, there is continuous opportunity with them to redeploy into deal #2 while still holding equity with return in deal #1.
So, it is possible that you achieve 20% average return on deal #1 while that same starting capital is re-invested and producing a return in deal #2. You’ll need a spreadsheet to calculate the return on the initial capital invested, but I can tell you it should be greater than 20% with some due diligence and using the “velocity” of money to pump up the returns. This is how they have been able to suggest 32% return is possible.
I will say this...savvy syndicators are capitalizing on bonus depreciation right now, which definitely helps the returns they are able to produce for their investors. The current tax law indicates that this phases out after 2022. So, get that lazy capital working now...
SFR. I primarily fix and flip and my systems and belief system is limited to that. Typing that why was tough because I would love an apartment and my beliefs have me staying at the SFR level.
SFR. I primarily fix and flip and my systems and belief system is limited to that. Typing that why was tough because I would love an apartment and my beliefs have me staying at the SFR level.
Time for me to think differently!
That's good man. I like it. What I didn't like about this post is that a lot of folks are saying they prefer the huge apartments but doesn't appear that most of them have ever actually owned huge apartments. So their preference is all based on theory & hearsay. That's not helpful content for the discussion. You though have stuck to what you have actual real world knowledge of. I dig that.