The Washington Post recently published an article outlining four reasons why single family home investments are better than apartment complexes. They are summarized below as more favorable financing, easier to sell, more properties available, and a safer investment.
1. More favorable financing - There are more favorable financing options available for a single-family house than an apartment building. You can also typically get lower down payments.
2. Easier to sell - If you have a portfolio of single-family homes, you can sell them as a package or individually. You can market them to commercial investors or retail buyers.
3. More properties to choose from - There are more single-family houses than apartment buildings and with a little work you can find great bargains.
4. Safer investing - In order to build wealth within your means, you need some wiggle room in the property. You’re always in a tenuous spot when there is no daylight between what you’ve put into a property and what you can sell it for.
Which do you consider to be a safer investment - SFH investing or multi-family investing?
Why single-family houses make better investments than apartment buildings - The Washington Post
@Marcella Hoard My experience in my market is the complete opposite. 2-4 unit property and/or small apartment complexes listed are typically under contract in 24-72 hours.
Also, the financing world has changed quite a bit in the last several years. There are some great 30 year products available for smaller apartment buildings, even below 1MM Fannie/Freddie stuff.
I have lots of SFHs but this article seems like it was written by a bored contrarian.
The Post, as usual, is wrong.
There is no bigger loss for investors than vacancy loss. If you have multiple tenants, your vacancy loss is significantly diminished offsetting any bump to the rate or a financing differential. The law of supply and demand would contradict single family properties are "easier to sell". You can't keep multi family properties on the market for more than a minute and investors are renovating their properties to create more multi family properties. It's pretty rare to see a multi family property converted to a single family right?
There is no safer investment for a young couple starting off than an ADU or a 2-4 unit property where the tenants pay the mortgage. House hacking is alive and well in America today.
I'll take a multi family investor property all day long over a single family.
5. My sons will not attend my funeral if I leave them multi-family property.
I'll opt for SFHs all day long.
"Vacancy and turnover is a killer", SFR have less vacancy and significantly less turnover.
”Do you see MfR converted to SFR”m yes all the time, mostly condo conversions
If you wanted to sell for top dollar would you sell to an investor or an owner occupant where price isn’t everything?
If your tenant isn't getting along with their neighbor it's much better when that person isn't also your tenant like MFR
When one of your tenant's water damage wrecks 2-3-4 of your other properties, also a MFR "feature"
Much more favorable downpayment and rates if you occupy for a year first then convert to rental.
During the last "Great Recession" I heard stories of MFR people losing their Las Vegas properties as rents collapsed or vacancy hit 50%. My Vegas SFR on the other hand experience rising rents and zero vacancy. The same has been true during covid. All tenants are current on rent and the 2 that moved out paid until they left. And new tenants are paying significantly more.
This could be because tenants tend to think of rental houses more as "their home" just as I would never consider a hotel room my home even if I lived there for years. Maybe people want years for the kids or pets, maybe they want their own laundry or garage, Or maybe SFR is just harder to compare.
I’m not saying MfR doesn’t have some advantages like more doors per loan, or consolidating all your properties in one neighborhood. But anyone pretending SFR isn’t equal or better is simply talking about a specific market or from a lack of experience.
There probably also has be a line drawn between less than 4 units and "real MFR" a market where 3-5% cap rates are real, a rate SFR and small MFR would never accept.
Give me an apartment complex all day.
Nonrecourse financing is available if I'm a GP, and if I'm an LP my risk is limited to my investment anyway. Way more favorable than smaller properties where your credit will be on the line. We also get awesome rates, along with many options for interest only loans.
Adding value - We can raise the value by repositioning the property and raising the NOI. It's not speculation, it's a business plan.
Professional 3rd party property management - When we buy hundreds of units in one place, we have enough margin to hire people in the office and maintenance people to handle all of the tenants, toilets, and termites. Don't want to deal with tenants? Great! They'll never know who you are. They know the Property Manager.
We do not compete with retail - Only other investors are buying our deal sizes, not someone who is looking to buy a home to live in that could fall in love with it and does not care if it'll cash flow or not.
Cost segregation and accelerated depreciation - we use cost seg firms to help us push more depreciation to investors, faster. Can't afford that with a single family.
Multifamily apartments all day!
I have zero commercial MF, but find the premise depicted to be biased. Advantages of commercial MF include
- Scalability. It is much easier to purchase, manage, etc one 100 unit building than 10" SFR.
- Discounts due to scale. Maintenance/cap ex is expensive on SFR and often under forecast by newer RE investors. Apartments have one roof, typically one or a few foundations, less hardscape per unit, etc.
- Apartments have value largely based on NOI. The cap rate range is typically well defined compared to the variation of appraised values based on comps. Appraisers, and there lack of skill, when appraising property is very frustrating. This alone may be enough to convert me to commercial MF.
- Vacancy impact is reduced due to typically higher unit count.
- Loans based on property numbers more than borrower. Loans also allow easier asset protection than F/F loans as they can be to LLC, corporation, etc.
I started in non-commercial residential less than 5 units. The cap rate numbers appear far better than commercial. What I have learned since is that many estimated expenses on non-commercial RE under estimate the actual costs. This is especially true of cap expenses and tenant turnover costs.
We have done outstanding with our 1 to 4 unit properties, but if I had started in commercial MF I still would have done outstanding, but I would have needed to do less work. Another thing to consider, have you ever heard of people transitioning from commercial MF to SF? Why do you think so many of the most successful investors transition from SF to commercial MF?
fortunately they both can work, but I have been considering the transition to commercial MF for a while.
I don’t have a dog in the fight
Any insight why Blackstone is buying $6,000,000,000 in single family homes vs apt complexes
I would generally agree, but very market specific. But if you are looking to ramp up your business quickly, multies much more efficient.
@Dan Heuschele I have a friend that 1031 exchanged an apartment complex for 20 or so sfr. to be able to sell one by one.
@Marcella Hoard in general sfh appreciate faster. It is easier to buy quality in a great area and reap the benefits with sf.. On the downside I have found with new tenant protections there is a bigger risk of your tenant doing serious damage to a nice place that cost more to fix back up. A unit is easily fixed and turned over. I have recently invested in nicer and newer homes and moved into higher rents with sf. Multi has more chance of conflict. Good to have managed for this time in my life. There were some problems with tenants getting along during covid.
Would you like pork or beef? I believe you will hear different answers.
@Marcella Hoard I don't think there is a right or wrong answer here. I know MF is lower cost per door, can force appreciation and scales infinitely better but I'm extremely risk averse and want the ability to sell any of my SFH if I needed to for any reason. They all cash flow well enough for me as I'm a W2er for the foreseeable future and I need that money 10-15 years down the road. I also don't like these 5-10 balloon rates for MF when interest rates are that low as I don't like doing 3-5 year projects and plan to hold and take care of my properties for a long time. If and when I chose to hang up my W2 then a MF will make a ton more sense than the SFH's I own.
I think the argument of “what’s better” is such a low level thinking argument as what matters most is where you are and what you want to do.
Originally posted by @Michael Plante :
I don’t have a dog in the fight
Any insight why Blackstone is buying $6,000,000,000 in single family homes vs apt complexes
Much like anything else, it's important to know your customer before making any recommendations. With that said, some answers are better than others - depending on who the investor is.
1. If you are a newer investor who is just starting out and you don't have a lot of cash to invest yet, the 5+ multi-family property may be out of reach. The higher the purchase price, the harder it will be to pull together the 20% down that would be required.
2. Rates on SFRs are lower than for MFHs (in the same market area).
3. From a maintenance perspective, the newer investor may prefer to start with an SFR (or duplex) before "chasing waterfalls".
4. Consider the implications of diversification. If you have heard the phrase "don't put all your eggs in one basket", you will recognize that the concept applies to real estate investing as well. If all of your units are in one building, that doesn't lend itself to the same type of risk reduction that you would get from investing in properties that are located in different cities throughout the US. For example, the market in Detroit is very different from the market in Austin right now. Diversification can help reduce your investment risk. If you can afford multiple MFH properties, then of course you can take advantage of diversification on a larger scale. If not, you can still take advantage of geographic diversification with SFR investing.
The biggest factor isn't listed. That MFH sell for absurd prices in many markets. Reason because so many investors want a multi.
The argument shouldn't be either/or. There are advantages to BOTH and I own both asset classes. SFH is a great way to begin your investing career. Multi-family also gives you great advantages to scale. The key is finding deals with criteria that work for YOU.
@Marcella Hoard I love this topic!
I built my career in SFH, and my company is 100% focused on this asset class as we wholesale and flip hundreds of those every year, but for my personal rental portfolio, I rather own Multifamily buildings. Having owned a property management company in the past, I've seen firsthand the difference between both asset classes, here are the main reasons why I rather buy Multifamily:
Less maintenance, there are not that many things that can break in an apartment compared to a house, or at least the big expense items are spread out by X number of units (for example a roof to replace). Since there are fewer things to break the cost for a "turn" after an eviction is also way lower than an SFH.
Vacancy, with a single-family, if your only tenant stops paying you can go in the red pretty fast, even when there's no income coming in, the operating expenses are still here and if the situation stagnates longer than expected (ex COVID) there might be a huge out of pocket cost. This doesn't happen with multifamily, even at 50% occupancy (or collection), you generate enough income to cover your expenses (assuming an expense ratio of 40%).
Easier to predict your exit price, The SFH valuations are based on market trends, Multifamily are underwritten based on performance if you're able to reduce your expenses and/or increase your income, and know what cap rate Investors are looking for in your area... you can accurately predict your upside.
Easier and faster to scale, buying rehabbing and managing 500 SFH is a hell of a lot more work than 500 apartments, with larger buildings you can have a management team on-site and benefit from economy of scale.
Better terms on financing, it's tough to get in but once you build a strong balance sheet you can have access to great terms with interest-only loans and most of them are non-recourse.
Less competition, everybody can get involved in SFH which drags the prices up, the barrier of entry makes Multifamily more of a niche market, I personally like to stay in the 30-90 units range, too big for small investors and too small for institutionals.
I still own a portfolio of SFH for diversification but down the road, I'll probably move this capital to Multifamily.