SFH vs. Multi in Houston

15 Replies

I am an American/Houstonian, currently living overseas. I have $300K cash to invest in properties. My Plan A has always been to buy as many SFH as I can, and then let a PM manage them for me. I'm a buy & hold kind of guy, so I love cash flows.

I bought 2 SFH this winter. However, since Jan, I've been unable to secure a contract at a reasonable price. Everything seems to be selling at blazing speed at very high price compared to last fall. So now I'm beginning to consider multis and small apartments too, even though these also present their own issues.

I have a few options:

Option A: continue buying SFH. Cap rate is about 7-8% Con: hard to get good deals, long & cumbersome process to buy several SFH.

Option B:  buy a 20-25 unit apartment for around $1M, cap ~10%. Con: low property quality no/or in bad neighborhood. 

Option C:  I expect to sell another property this summer which will give me additional $300K to invest in. So option C is to wait a few months and buy a larger 40-50 unit apt for around $2M, cap ~9%. Con: the wait. And I'll be putting all my beans in the same basket, practically. 

What should I do?

Or Option D?

My thought on your option B is that a good deal on small complex apartment in Houston is very hard to come by. If it's a good one, it doesn't even show up on the market. Also, since you are an out of state investor, I'm not sure how much you are comfortable in a value-added complex.   

It's most likely that you will have to pay premium on a small complex with less competition that require less work and already cash flow.  And it probably will be less than 10% cap.   

I'm surprised your cap rates are so low for your single family. If you are paying retail and only looking on the MLS then i could understand. As a rule, we only pursue wholesale properties for land lords if the buyer can achieve 11% CAP rate and 15% equity or better. Most fall at 12-13% CAP.

As for your other options, Diversification is over rated.  With that said, i feel like multifamily in Houston is a little inflated right now.  Class C space is 9 and 10 cap when last year it was 12 and 13 cap.  We have TONS of new units coming on line this year to meet demand, and we I think we are going to see rent rates fall late this year to early next year.

When you are talking about that much cash to put to work, be it in SFH or MF, you want to make sure you are timing the market appropriately. I think SF in houston is a safER bet right now for a long term hold then MF right now.

Irrespective of timing considerations, Option D would be to invest in larger apartment syndications.    Seems like a good option for someone living overseas, since all you have to do following due diligence and funding is collect distributions.  (and hopefully participate in voting/governance)

Thanks everyone for the quick responses!

Please pardon my newbie questions. 

@NateP what are the sources of deals other than public listings & website?  I found a couple of newly refurbished complex in bad part of town with 10-11% cap. Since they have been recently refurbished, am I correct to expect less handholding?

@SamC I didn't know class C apts traded at 12-13% cap last year! That fact alone means the apt pricing is at its peak right now. Back to SFH, perhaps my biggest problem is sourcing. You are correct that I solely rely on MLS. What other sources should I consider? I looked at a wholesaler last year but was turned off because his prices were the same retails. Btw, my criteria for SFH is middle class 4 bd, priced from 150-low 200's, built in 1995 onwards.

@csoignier That sounds interesting. Where can I look at potential syndication deals? 

Originally posted by @Sam Craven :

I'm surprised your cap rates are so low for your single family. If you are paying retail and only looking on the MLS then i could understand. As a rule, we only pursue wholesale properties for land lords if the buyer can achieve 11% CAP rate and 15% equity or better. Most fall at 12-13% CAP.

As for your other options, Diversification is over rated.  With that said, i feel like multifamily in Houston is a little inflated right now.  Class C space is 9 and 10 cap when last year it was 12 and 13 cap.  We have TONS of new units coming on line this year to meet demand, and we I think we are going to see rent rates fall late this year to early next year.

When you are talking about that much cash to put to work, be it in SFH or MF, you want to make sure you are timing the market appropriately. I think SF in houston is a safER bet right now for a long term hold then MF right now.

@Sam Craven, what operating expenses do you use for SFR and where do you get reliable analysis from the market to determine if you are buying above or below market cap?

@Bob Bowling  When I am evaluating my own rentals or ones for wholesale i do NOT use the 50% rule.  We don't need another one of those threads but for my personal properties and wholesale properties we front load the expenses and make a nice house.

With regard to above or below market cap rates are you referring to SF or MF?  MF I'm simply comparing cap rates from 6-12mo ago to what they are selling for now.  Like i mentioned before, I also need to have a pulse on whats going on in the class A space for new apartment build completions and starts.

For SF im not looking at "market cap rate" im looking at the value of the home compared to rents, and whether either one is trending up or down.  The value of the home is not affected by the rental rate where in MF the driver of value is rental rate and cap rate the market will bear.

@Sam Craven This is what you stated about SFR's.. " I'm surprised your cap rates are so low for your single family. If you are paying retail and only looking on the MLS then i could understand. As a rule, we only pursue wholesale properties for land lords if the buyer can achieve 11% CAP rate and 15% equity or better. Most fall at 12-13% CAP."

My two questions related to your above statement. I never mentioned the 50% expense market since it has NOTHING to do with NOI and hence Cap Rates. Now can you answer my two questions?

@Bob Bowling 

My statement of the 50% rule was presumptive of me that that's what you were asking.

For the properties we wholesale we dont use a % or dollar value of gross returns to arrive at a cap rate. When it comes to SFH and our customers its all over the map. Some people don't assume any repair contingency and others use 50%. So our pro forma estimate will give people the raw numbers they need to then draw their own conclusions.

For my personal portfolio it depends on the age of the property, and how much work i am doing up front, i dont use a fixed number the variables are too great to apply a one size fits all number.

As for cap rates, i feel like i answered your question. But let me take it a step further:

My statement regarding single family cap rates Chip found looking low, was based on what I am seeing currently in the market in Houston. I dont consider retail properties on the MLS to be a good indicator of potential cap rates for SFH in Houston (or any market). Its also a terrible place to go looking for rentals. Its too easy to work with a reputable home buying company like ours or others that offer properties at a discount to retail.

Originally posted by @Sam Craven :

@Bob Bowling 

As for cap rates, i feel like i answered your question. But let me take it a step further:

My statement regarding single family cap rates Chip found looking low, was based on what I am seeing currently in the market in Houston. 

I don't see where you answered either of my questions.   

1. To get a cap rate you need a NOI. I asked what operating expenses on a SFR do you use.

2.  What do you mean by "seeing"?  Is this some turnkey guy TELLING you what cap rates are or do you "see" the calculations that are done by other investors on their purchases?  

Bob, I answered question 1.  

I told you I dont provide a number on our wholesale deals for expenses so its up to the buyer to determine NOI and so their own cap rates. Cap rates we advertise only include the PITI expenses. I also said i think it is not a good idea to stick in a random number and have it fit the expense profile of a house built in the 30s thats worth $300k and a house built last year thats worth $100k.

2) Buy "Seeing" I mean my company is buying 8 properties a month right now from $3,000 to $1M+ to flip or wholesale and we have a pulse on the market we can trust.  I am not trusting someone else's quoted numbers.  We are large enough to trust our own numbers and analysis.

@Sam Craven and @Nate Paoinchantara it sounds like you have experience with REI in Houston. I own a small to medium sized apartment complex there and wanted to see if you had any recommendations on good property managers?

@Sam Craven thanks for your input Sam!  I've heard a lot of great things about them.  It is just sad that they do not currently management apartment complexes.  

Hi @Chip Ciputra in my opinion I would be looking at multi family properties. Based on my background the numbers on apartments always seemed favorable versus single family homes and contrary to what some say in regards to the deals that you should be getting on SFHs this isn't always the case. You may have to wait in order to find a good apartment deal, but patience and persistence pays off.

@Rachel Pervis yes you have a point, same point I was thinking. Why not spread that $300k out into smaller multi families (2-4units). They are easier to manage as all units are in one place (just not as many makes it less of a headache in comparison to 5+ units). Anyway, I may be of some use as I'm looking for off market deals in Houston areas now with a friend of mine that just moved there.

@Chip Ciputra If you're interested in being notified of anything I find then send me a colleague request and let's talk. The investor in working with also works offshore and I'm planning on moving overseas to China this year so I'll be doing a lot of online wholesaling.

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