Why choose multi-family units than single-family homes for rental

20 Replies

I own several single-family homes in Kansas City and they are all successfully rented out for a great return (about 14% average). I have been told by many successful investors that the next step I should look into is buying multi-family units. I am in a place where I am able to do that and I have been touring different properties (multi-families between 10-50 units) but I cannot wrap my mind around the return which seems to average around 7%. I understand that management is a lot easier for 20 units under one roof vs. 20 single homes but when the return is literally half, why should I consider multi-family? Would love to hear from anyone with experience on the two types of investments and if I am missing something.

There are tons of pages, articles and blog post on this subject.  Here's a recent one written by @Brandon Turnerhttp://www.biggerpockets.com/renewsblog/2015/10/26...

A few I can think of on top of my head are ...

1) When a SFH is vacant, no income coming in. As oppose to multi-units where you'll have # of doors producing income and if one becomes vacant, the other unit(s) will still generate some income

2) Dealing with one insurance policy rather than multiple for SFH's

3) Financing is a big one for me. You can either use your credit to purchase 1 SFH or a 2+ multi-unit. Example: You can have up to 10 SFH's on your credit for investment, but what if you have ten 4-units. That's 40 doors as oppose to 10 SFH doors.

4) SFH you can only increase the value so much, since appraisers will use comps in the area to determine value. Where as Multi units are opposite and is based on #'s.

List can go on and on... there are pro's and con's. But I've seen multi units having a better return in most case. Doesn't hurt to diversify your portfolio and add a multi-unit to test it out. Maybe start out with a duplex to get your feet wet. But it's usually a good idea to focus on a niche and really master it. Whether it's SFH, Smaller Multi Units or Apartments.

Originally posted by @Johnny Youssef :

I own several single-family homes in Kansas City and they are all successfully rented out for a great return (about 14% average). I have been told by many successful investors that the next step I should look into is buying multi-family units. I am in a place where I am able to do that and I have been touring different properties (multi-families between 10-50 units) but I cannot wrap my mind around the return which seems to average around 7%. I understand that management is a lot easier for 20 units under one roof vs. 20 single homes but when the return is literally half, why should I consider multi-family? Would love to hear from anyone with experience on the two types of investments and if I am missing something.

There are some basic differences.

With Multi-family, if you have one unit vacant, it's less than 100% vacancy. With SFR, when a unit is vacant that unit has 100% vacancy.

With multi's, you have more tenants supporting each property. Lose one, you still have others - the impact of a vacancy is lower per property.

SFRs are appraised and financed based on surrounding comparable sales. Multi-family is valued and financed based on its ability to produce income. 

Those are two big ones. There are others.

A preference for one or the other may depend on your investing goals, financial goals, etc.

Personally, I don't focus on the return as a ratio, I look at the dollar amount because that focuses on my personal financial goals.

My $0.02 ...

Johnny, I don't think you should consider multi-family. You have found a strategy that you are comfortable with, have strong processes for and is producing a nice return for you. Stay the course unless and until you can't find enough deal-flow for you capital, then consider other options.

Nice work with your investments to date!

Originally posted by @Johnny Youssef :

@David Dachtera @Christopher Suh Thank you guys! Helpful and I am reviewing Brandon's blog now. 

Great points especially with appraisals. 

Let me clarify, also. When I say "multi", I'm usually talking 5+ units which are considered commercial properties and are treated differently from 1 to 4 unit properties which are still considered residential. 

Excellent question. I've gone back to SFRs from multi-family 2-20 units because my experience has been the ongoing returns AND appreciation are much better in SFRs. The reason I went into multi-family was because it allowed me to scale to more units much quicker. But when I realized I was sacrificing return for scale I have gone back and am buying houses again. I'm probably going to continue in multi-families but very selectively for the best deals.

For me, I am going to focus more on multi family.  The return for my time is better.  The points I like best for multifamily is 1 insurance policy, 1 mortgage, 1 property manager, 1 type of furnace, 1 roof, 1 closing, 1 inspection.  I will sacrifice a little bit of % return for less effort on these items.

@Johnny Youssef I invest in single family for three reasons.  1. Decent multifamily homes are hard to come by in my area.  Most are in not so great areas and are very old.  2. Single family homes appreciate at a faster rate.  3. There are more exit strategies for single family (more types of buyers).  

I've never understood the argument that multi-families are better investments due to the vacancy issue. If a resident moves out of an SFR, it is true that that unit is 100% vacant. But your portfolio is not 100% vacant (unless you only have one rental house). If you own 20 SRFs or two 10-unit apartments, a resident moving out impacts your vacancy rate the same way, I would think.

I'm not against apartment investing at all. The vacancy issue seems irrelevant, though, unless I am misunderstanding the logic.

Depends on your market. Different places have more/better inventory of different types of properties. The big advantage I see in multifamily is just the amount of time and effort you need to aquire as many units as possible. Its way less work to aquire a 20 unit building as opposed to 20 SFHs.

There is also the issue of local vs remote ownership.  As an out of state investor, I would be very concerned about PM on a sfh.  In larger MF properties you can get more professional PMs. PM is critical to the success of your investment.

The issue of property value would be of concern if you plan on selling at some point.  Some areas are better for cash flow.  The fact that you can force appreciation on commercial MF properties is important if your exit stradegy includes selling the property.

Management is way easier but if I could get 14%, would keep doing SFH as well. In NJ, due to higher taxes, SFH returns are actually lower than multi-fam for the most part. For example, In 8 unit building the taxes are about 16K per year or 2K per unit whereas if I bought a single the taxes are about 6k at a minimum. This and insurance per unit ends up being much more expensive and kills most deals. Even 2-3 Fam are tough unless you buy at the right price. However, while the vacancy for us has been Zero for the last 3 years (I have 24 units), there is decent turnover and in the SFH that most of my friends have, the turnover is WAY less and reduces your costs in some way. Just my 2 cents and again, As the one poster said, if you're successful and getting 14%, keep your successful formula going as long as you can get lenders to lend on portfolio going forward.

My issue with MFs is that you have to sell to an investor.  This limits your options and the buyer is going to want a deal... With SFHs you have many more options no matter what the market is doing.  The name of the game is options.. I've been stuck with MFs when i was leveraged to the till and i could not get out when the market went south. 

You also get better tenants with SFHs.

Keep rolling!!!

Johnny,

I own both single family and multifamily and in general I like to stick to single family.  You are correct, the returns are usually much better.  I think part of the reason for that is tenants pay everything but taxes and insurance.  Also, I find tenants are willing to pay more for their own house (maybe thats just in my area).  With multifamily, there is usually parking, common areas, landscaping, etc that is the landlord's responsibility.  

Also, don't let anyone tell you financing is better for multifamily.  I usually package 10 homes together with each loan I get and it is the exact same loans and same terms I get with multifamily loans.   Same goes for insurance.  One of my insurance policies has 24 homes on it.  

One issue is management; its easier to manage a single building.  However, there are issues with that as well....  If there is a leak in a unit, every tenant below may be effected.  If there is bedbugs in a unit, you can be sure the entire building will know about it, if a boiler goes down, you may have 50 tenants who are freezing.   If one of your many single family homes has an issue, it causes no problems for any other tenant.  

I like both sides of the argument, but I prefer single family homes for the higher returns at this point in time.  If the market turns that may change as well, but right now I would stick to your gut and do what you think will make you the most money.  

Chris

Be advised:  Many states require on onsite manager when the number of units is greater than X -- in Calif, that's 16 or more.

I like my 6-unit MFU as it's current FMV is directly related to the GSI and I can control that. A conventional SFR is always valued that comps, which I can not control.

Originally posted by @Dawn Brenengen :

@Johnny Youssef I invest in single family for three reasons.  1. Decent multifamily homes are hard to come by in my area.  Most are in not so great areas and are very old.  2. Single family homes appreciate at a faster rate.  3. There are more exit strategies for single family (more types of buyers).  

I like Dawn's approach and I follow the same. I highlighted her last sentence because I don't think enough people pay attention to exit strategy. If/when you decide you want to be out of a MFH situation, your pool of potential buyers is infinitely smaller and full of investors wanting a "deal". And, just as in SFH, you have no control over the evolution/devolution of the neighborhood - but, unlike with SFH (unless you own entire blocks), one house located in a deteriorating area takes just a minor portion of your portfolio down, whereas one declining MFH construct might be your entire portfolio. If the idea of diversification is a good one, nothing is more diversified than having 10 SFHs of different size, construction, and neighborhood, vs. one 10 MFH unit of identical units and materials.

Personally, I believe MFH is better suited for a well-experienced investor with a lot of funds to play with and other investment streams. To me, MFH is like going all in at the craps table in Vegas, even if you're the house. 

Hello

I share the ideas of @dawn and @johnny -- SFR has advantages but I will modify that to include include 2-4 multi family family as advantages. Larger than 4 units means far less financing opportiunitys and commercial lending ....which is a pain.

Rents per $ cost of construction/values are far better in a 2-4 family than a SFR single family.

In Seattle 300,000 buys a single wide mobile on swampland  which you can rent for 1500.oo  But in some parts of town $450,000-$500,000 will buy a triplex or a 4 plex renting for $1000 - $1500 per unit.  So now I double or triple the cashflow for not much more cost of aquistition

  • Now a vacancy in one unit means I feed the mortgage vs the rent is spread over 3 or 4 units....so cashflow is not tied to one tenent as per per SFR
  • I still get FNMA 1-4 family pricing on the loan - and can sell it to a VA or FHA owner occupied buyer with 3% OR 5% down....
  • I only pay $600 for the appraisal on a 1-4 vrs a commercial MAI appraisal costing $1800. with the enviromental overlays...
  • Commercial loans for 5 units or more are ALWAYS less favourable with calls and adjustables only.
  • I can list it through any realtor and the market of prospective buyes far exceeds the multifamily market.
  • It is easier//cheaper to finance and manage 3 x 4plexes than try and do the same with a 12 plex. Cashflow will probably be better for the same cost of construction....
  • Easier to zone a 4 plex in suburbia than a multifamily and

That is my two bits worth...

Regards

Richard Scholtz

@Johnny Youssef
I like the comments on return for time. Here is what I think to be a great example. I spent the last 3 months working a deal to buy a 16 unit building. Operating well and when paid down will offer $70k a year in my pocket with others managing. This is a $685k deal and only $10k from my pocket to get in.

In the same time my buddy has been working on a deal to buy two single family homes. He will have a lot of renovations and man hours once the deal comes through. $180k deal and $10k from his pocket. But only $20k each year of income down the road when paid off.

Same money out of our pockets, same time to set up the deal, very different end results. I believe multi is the fastest way to scaling long term wealth.