Help me understand the advantage of multi's

78 Replies

I frequently hear/read that large multifamily properties (i.e., apartment complexes) produce better returns than SFH or small multifamily (2-4 units) properties. I just can't see it in the numbers, as I can figure them. When asking why large multis are better than SFH I've gotten responses such as 'economies of scale', meaning maintenance and property management are cheaper when done in large numbers and at a single location. However, if I'm not mistaken, cap rates take these expenses into account, and cap rates under 10% just don't look like good deals to me, in comparison to SFH returns (at least those I have access to). Please tell me if you think my analysis below is on track, or if it is mistaken somewhere.

Let's say we look at every $100,000 of property value of a MFH compared to SFH. If an apartment complex is at a cap rate of 8%, this means net operating income (gross income - operating expenses) =$8000/year. This comes out to $667/month for every $100K of property value. Say the debt service is $550/month (80% LTV, 5.5% interest, 20 year amortization), that leaves net income of around $117/month. I also believe the calculation to this point does not include capital expenditures. This $117/month – capex isn't very impressive, compared to the return I'd expect from a $100K SFH purchase.

A positive aspect of MFH can be forced appreciation, that is, renovating etc. to be able to raise rents and property value. Let's say rehab is done so as to allow a 25% increase in rents (e.g. from $800/mo to $1000/mo), so as to increase cash flow by $200/month, that takes you to $317/month - capex. That is an improvement, but still something achievable with a $100K SFH that you rehab (e.g. BRRR). The rehabbed MFH will now have a greater resale value (due to the increased rents), but so will the rehabbed SFH. One positive with the SFH route is that by using the BRRR strategy you can refinance and pull all your cash (or more) back out quickly, rather than having to wait for the time it takes to rehab an apartment complex before refinancing or selling (which is an opportunity cost).

Some might say a benefit of purchasing an apartment complex is the time savings of being able to make a single purchase (for example) of $2M, rather than 20 purchase of $100K SFH. However, it seems to me that the process of finding, negotiating, doing due diligence etc. for a $2M apartment complex may not be much less than that of purchasing 20 SFH.

Another advantage I've heard claimed about MFH is that if you have 40 apartments, one or two vacancies don't hurt your cash flow that much, compared to having a vacancy in a single SFH. In this case an appropriate comparison would actually be having one or two vacancies out of 20 SFH (or whatever number would equal the value of the MFH used in the example), which wouldn't be that bad.

I can see there being an ego boost in buying an apartment complex, which could make someone feel like ‘one of the big boys’, but I just don’t see it in the numbers. I keep looking for the big advantage of large MFH, but haven’t been able to see it in the numbers. What am I missing?

@Eric James

(in my opinion)...

Much of the value is created in the building or renovation of a project

The cap rates you see DO NOT reflect the costs associated with building the apartment complex.

I've seen CBRE advertising 100+ unit apartments that were already built at 5% cap rates.

Of course they aren't going to mention in many cases there's a 40% + margin that the builder is making on their multi million apartment complex.

Take it to the bank (and of course this depends on the economy) that the builder is well financed and making a killing if they are selling it for anywhere close to asking.

For large institutional investors of course a 5-8% cap rate is great.  They have a lot of money to invest.

The take away for you and me is to get ready to roll up your sleeves and put yourself in a position to get the thing built.

If that means start with the rehabs (and more and more aggressive as you go) then go for it.

@Eric James I can only tell you from my experience that I took into account the pros and cons and am doing mfh and actually selling off my sfhs at the moment because ultimately they are not scaleable. Sfhs are a great way to get started but everyone’s situation is different. To be able to advise I would need some personal info like how much liquidity and how much time you have on your hands.

Hi @Eric James

Those are great observations you have made. However, I had 10 single family condos here in San Diego cash flowing at about $50,000 a year. Next, 1031 exchanged them for apartment complexes in NE Ohio. Now I have $160,000 in cash flow and have exponentially increased the value, by repositioning value plays, David Lindahl style. A few of these apartment complexes I have owned for less than 2 years and have increased the NOI dramatically, increasing the value of the property and NOT being at the mercy of comps.

Don't get me wrong, I have made a few mistakes, but now I have learned my lesson and have some really nice value plays that we are in the middle of repositioning and that cash flow should continue to rise. I just signed an LOI for another 34 units, about $8,000 a unit under market too.

I would read David Lindahl's Multifamily Millions book.  It was extremely helpful to me!!

Swanny

Originally posted by @Eric James :

I frequently hear/read that large multifamily properties (i.e., apartment complexes) produce better returns than SFH or small multifamily (2-4 units) properties. I just can't see it in the numbers, as I can figure them. When asking why large multis are better than SFH I've gotten responses such as 'economies of scale', meaning maintenance and property management are cheaper when done in large numbers and at a single location. However, if I'm not mistaken, cap rates take these expenses into account, and cap rates under 10% just don't look like good deals to me, in comparison to SFH returns (at least those I have access to). Please tell me if you think my analysis below is on track, or if it is mistaken somewhere.

Let's say we look at every $100,000 of property value of a MFH compared to SFH. If an apartment complex is at a cap rate of 8%, this means net operating income (gross income - operating expenses) =$8000/year. This comes out to $667/month for every $100K of property value. Say the debt service is $550/month (80% LTV, 5.5% interest, 20 year amortization), that leaves net income of around $117/month. I also believe the calculation to this point does not include capital expenditures. This $117/month – capex isn't very impressive, compared to the return I'd expect from a $100K SFH purchase.

A positive aspect of MFH can be forced appreciation, that is, renovating etc. to be able to raise rents and property value. Let's say rehab is done so as to allow a 25% increase in rents (e.g. from $800/mo to $1000/mo), so as to increase cash flow by $200/month, that takes you to $317/month - capex. That is an improvement, but still something achievable with a $100K SFH that you rehab (e.g. BRRR). The rehabbed MFH will now have a greater resale value (due to the increased rents), but so will the rehabbed SFH. One positive with the SFH route is that by using the BRRR strategy you can refinance and pull all your cash (or more) back out quickly, rather than having to wait for the time it takes to rehab an apartment complex before refinancing or selling (which is an opportunity cost).

Some might say a benefit of purchasing an apartment complex is the time savings of being able to make a single purchase (for example) of $2M, rather than 20 purchase of $100K SFH. However, it seems to me that the process of finding, negotiating, doing due diligence etc. for a $2M apartment complex may not be much less than that of purchasing 20 SFH.

Another advantage I've heard claimed about MFH is that if you have 40 apartments, one or two vacancies don't hurt your cash flow that much, compared to having a vacancy in a single SFH. In this case an appropriate comparison would actually be having one or two vacancies out of 20 SFH (or whatever number would equal the value of the MFH used in the example), which wouldn't be that bad.

I can see there being an ego boost in buying an apartment complex, which could make someone feel like ‘one of the big boys’, but I just don’t see it in the numbers. I keep looking for the big advantage of large MFH, but haven’t been able to see it in the numbers. What am I missing?

My numbers in San Diego show the same thing that you are seeing. I show the best numbers/expected ROI to be a quad followed by a triplex followed by a duplex followed by SFR and then true multiplex (5+ units). Unlike @Michael Swan I am comparing units in the same location (all units in San Diego) versus Swanny is comparing San Diego SFR to Ohio MF which is a bit of an apples versus oranges comparison. I suspect the reason he did not invest in San Diego MF is that the expected MF ROI did not exceed his San Diego SFR ROI (and note my analysis shows that he would have had better ROI with San Diego Quads to duplex versus his SFRs (condos and SF houses)).

I do believe in the argument that the true MF are easier to scale. We are at near our maximum that we can handle with our current processes. We actively manage 12 units, family manages 4 units, 2 units use PM for STR, 1 unit uses PM for OOS. So my belief is somewhere at ~20 units working it as a part-time responsibility starts to have impacts on life style. Note I am not stating any unit takes much time but 19 units add up to more time than I wish. The amount of time we spend is likely less than 10 hours a month on average and most months (those without tenant turnover) are likely 2 to 3 hours a month. So my complaint about the scaling is as much about the lifestyle we choose (leaves very little time for managing RE) as much as about the time it takes. If we had a 20 unit apartment there would be a single, likely live-in, PM for all units and I suspect it would be about the effort of 1 or 2 self managed units (maybe average 2 hours/month).

At some point we will likely transition to true MF but we know our niche well and it has produced outstanding ROI for us. So we are not planning the transition to true MF in the near term (maybe 5 years from now we will only be looking at MF).

Originally posted by @Lane Kawaoka :

Eric James I can only tell you from my experience that I took into account the pros and cons and am doing mfh and actually selling off my sfhs at the moment because ultimately they are not scaleable. Sfhs are a great way to get started but everyone’s situation is different. To be able to advise I would need some personal info like how much liquidity and how much time you have on your hands. 

@Lane Kawaoka What are you referring to about SFH not being 'scaleable'? In what way would you say MFH are scaleable and SFH are not?

Originally posted by @Michael Swan :

Hi @Eric James

Those are great observations you have made. However, I had 10 single family condos here in San Diego cash flowing at about $50,000 a year. Next, 1031 exchanged them for apartment complexes in NE Ohio. Now I have $160,000 in cash flow and have exponentially increased the value, by repositioning value plays, David Lindahl style. A few of these apartment complexes I have owned for less than 2 years and have increased the NOI dramatically, increasing the value of the property and NOT being at the mercy of comps.

Don't get me wrong, I have made a few mistakes, but now I have learned my lesson and have some really nice value plays that we are in the middle of repositioning and that cash flow should continue to rise. I just signed an LOI for another 34 units, about $8,000 a unit under market too.

I would read David Lindahl's Multifamily Millions book.  It was extremely helpful to me!!

Swanny

 @Michael Swan

I was just listening to your BP podcast on my way home from work today. No doubt your 1031 exchange has led to you to greatly increased cash flow. The question I'm asking is: is your cash flow greater than if you had either 1031'd or refinanced your condos to purchase SFH in the same area as your MFHs?

My observation is, I'm not seeing why a downpayment for purchasing $2M of real estate produces more cash flow when purchasing a 1 MFH compared to 20 SFH. Also, whereas MFH have 'value plays', it would seem that BRRR'ing is more or less equivalent with SFH. What do you think?

Originally posted by @Dan Heuschele :

My numbers in San Diego show the same thing that you are seeing. I show the best numbers/expected ROI to be a quad followed by a triplex followed by a duplex followed by SFR and then true multiplex (5+ units). Unlike @Michael Swan I am comparing units in the same location (all units in San Diego) versus Swanny is comparing San Diego SFR to Ohio MF which is a bit of an apples versus oranges comparison. I suspect the reason he did not invest in San Diego MF is that the expected MF ROI did not exceed his San Diego SFR ROI (and note my analysis shows that he would have had better ROI with San Diego Quads to duplex versus his SFRs (condos and SF houses)).

I do believe in the argument that the true MF are easier to scale. We are at near our maximum that we can handle with our current processes. We actively manage 12 units, family manages 4 units, 2 units use PM for STR, 1 unit uses PM for OOS. So my belief is somewhere at ~20 units working it as a part-time responsibility starts to have impacts on life style. Note I am not stating any unit takes much time but 19 units add up to more time than I wish. The amount of time we spend is likely less than 10 hours a month on average and most months (those without tenant turnover) are likely 2 to 3 hours a month. So my complaint about the scaling is as much about the lifestyle we choose (leaves very little time for managing RE) as much as about the time it takes. If we had a 20 unit apartment there would be a single, likely live-in, PM for all units and I suspect it would be about the effort of 1 or 2 self managed units (maybe average 2 hours/month).

At some point we will likely transition to true MF but we know our niche well and it has produced outstanding ROI for us. So we are not planning the transition to true MF in the near term (maybe 5 years from now we will only be looking at MF).

 @Dan Heuschele

When people talk about MFH I think they are almost always including PM in the expenses. Therefore, I think this should be included in comparing MFH investing to SFH. Your SFH wouldn't be a lifestyle problem if you paid for PM out of the income (though of course you would keep less of the $). At a certain scale, I'd think PM just has to be paid for (whether MFH or SFH).

Originally posted by @Eric James :
Originally posted by @Dan Heuschele:

My numbers in San Diego show the same thing that you are seeing. I show the best numbers/expected ROI to be a quad followed by a triplex followed by a duplex followed by SFR and then true multiplex (5+ units). Unlike @Michael Swan I am comparing units in the same location (all units in San Diego) versus Swanny is comparing San Diego SFR to Ohio MF which is a bit of an apples versus oranges comparison. I suspect the reason he did not invest in San Diego MF is that the expected MF ROI did not exceed his San Diego SFR ROI (and note my analysis shows that he would have had better ROI with San Diego Quads to duplex versus his SFRs (condos and SF houses)).

I do believe in the argument that the true MF are easier to scale. We are at near our maximum that we can handle with our current processes. We actively manage 12 units, family manages 4 units, 2 units use PM for STR, 1 unit uses PM for OOS. So my belief is somewhere at ~20 units working it as a part-time responsibility starts to have impacts on life style. Note I am not stating any unit takes much time but 19 units add up to more time than I wish. The amount of time we spend is likely less than 10 hours a month on average and most months (those without tenant turnover) are likely 2 to 3 hours a month. So my complaint about the scaling is as much about the lifestyle we choose (leaves very little time for managing RE) as much as about the time it takes. If we had a 20 unit apartment there would be a single, likely live-in, PM for all units and I suspect it would be about the effort of 1 or 2 self managed units (maybe average 2 hours/month).

At some point we will likely transition to true MF but we know our niche well and it has produced outstanding ROI for us. So we are not planning the transition to true MF in the near term (maybe 5 years from now we will only be looking at MF).

 @Dan Heuschele

When people talk about MFH I think they are almost always including PM in the expenses. Therefore, I think this should be included in comparing MFH investing to SFH. Your SFH wouldn't be a lifestyle problem if you paid for PM out of the income (though of course you would keep less of the $). At a certain scale, I'd think PM just has to be paid for (whether MFH or SFH).

I primarily agree with your point but I do think W2 workers instead of PM can work but probably is more hands on than using a PM but ideally provides better  profit.  We have considered going this route but to start to go this route takes time.  Any employee turnover will result in further time being needed.

Do you think using a PM to manage 20 SFRs is a little work as managing a PM to manage a 20 unit apartment? I lean towards no but have no experience to base my opinion on. The PM we use for the 2 STR units actively involves us in all repairs but they probably do this because a majority of their clients prefer this.

Do you think using a PM to manage 20 SFRs will be the same cost as using a PM to manage a 20 unit apartment?  Again I suspect not especially if the PM of the 20 unit apartment is a live-in PM.

Originally posted by @Dan Heuschele :

I primarily agree with your point but I do think W2 workers instead of PM can work but probably is more hands on than using a PM but ideally provides better  profit.  We have considered going this route but to start to go this route takes time.  Any employee turnover will result in further time being needed.

Do you think using a PM to manage 20 SFRs is a little work as managing a PM to manage a 20 unit apartment? I lean towards no but have no experience to base my opinion on. The PM we use for the 2 STR units actively involves us in all repairs but they probably do this because a majority of their clients prefer this.

Do you think using a PM to manage 20 SFRs will be the same cost as using a PM to manage a 20 unit apartment?  Again I suspect not especially if the PM of the 20 unit apartment is a live-in PM.

I too like to self manage (for now) when I can.  However, I have a triplex about 500 miles away from where I live and have  a PM manage that for me.  It is almost zero work for me.  PM is one area where I could see a large (>100 unit) MFH being significantly cheaper to run, though I don't know by how much.  I have heard that small MFH (e.g., < 50 units) are problematic to manage, because of the need for part time help, but that this is easier with larger (>100 units) complexes.  

Eric,

I am not a pro at MFH, as a matter of fact i am in the process of buying my first one, an old school and converting it to 17 apartments. one thing with MFH you need to consider is that when a multi family property is a 5% cap, that just means it is in a steadier market and that your rent you can charge may be a little higher, but always coming in. you may have 2 vacant units, but in a property that is considered a 10 or 12 cap you may have 5 or 6 units vacant and a lot of turnovers which in turns equals more maintenance and advertising costs, CAP rate is measurement of the building in the market area, a lower cap rate usually means a a more consistent rate of return, usually the tenants stay longer, less turnover, so less maintenance and marketing involved.

Patrick Liska, Contractor

Hi @Eric James ,

I was really worried about being at the mercy of comps anywhere I invested. The Multifamily business model's primary valuation is NOI. Last, economies of scale were very important to me. With the 10 single family, I had 10 mortgages, 10 roofs, 10 insurance policies, 10 tenants I was self managing etc... eventually as I kept expanding it would have started to feel like another job. I already had 2 teaching gigs and did not want another job. Here is the real kicker. A few of these apartment complexes, I have already increased the NOI so much, I could refinance and take back all the money I invested in them in one year time from now. However, I will take 2-4 more years of cash flow and then refinance or 1031 Exchange for a larger complex. I am not at the mercy of comps. With single family (1-4 units), I am 100% at the mercy of comps.

Oh yeah,

Dead equity in single family did not excite me.  I wanted that money making more money, but the valuation of single family is way to high in San Diego and they are starting to ease up the lending standards.  When morons that can't even do Dave Ramsey's kindergarten financial planning strategy strategy to get as far away from zero as they can are NOW too qualifying for loans, that really scares me.

You also have to realize that the most I have ever made W2 combined family income was $80,000.00 in one year in a pricey area of the country to live.  Many people on BiggerPockets that I speak to make double or triple my Family combined W2 earnings.  My motivation may be totally different than yours.  My goal is to have 1000 front doors or more, $750,000 cash flow per year and 15 million in equity and $50,000,000.00 in total RE.  Then, I will die and my son will inherit that at a stepped up basis and depreciation will start all over again.  If he wants to he can continue on the same path, paying very little taxes and maybe he could have 5000 front doors some day.  I figure I might as well dream big.  Imagine if I achieve half my goals.  That would be pretty amazing.

Right?

Swanny

some example of the value of scale.  Keep in mind we are talking scale, at 10 units these economies are different.   

100 SFH vs a single 100 unit apartment complex (lets say 10 buildings total, 10 units in each building). All units rent for $700 a month. So $70,000 gross a month both properties

For the SFH you are paying a PM 10%, so $7000 a month. For the apartments you hire a full time manager for $3500 or less a month plus some part time staff. Easy to imagine paying less than SFH.

-100 HVAC units vs 10

-100 roofs vs 10

-100 layouts vs 10

1 size door and few size window instead of hundreds.   1 property bill instead of hundreds.  etc...you get the point.

The easiest way to prove this, other than the examples above, is to "follow the money". Until the housing crash in 2008 there was not a single hedge fund of REIT doing single family. Simply because if you need to invest millions, SFH does not scale. Because SFH got so cheap they actually started funds with thousands of homes, if you look into the return, they just have not done well. Even when you have scale, lets say 1000 homes within a 20 mile radius, you start your own property management, you treat it like an apartment...the returns are just not there compared to MF.

Hey Eric.  Well written post.

I agree on the vacancy question.  I've never understood why some investors consider the number of vacancies on 40 homes versus the same number of vacancies in a 40 unit community to be different.

Change your debt terms to 75% LTV, 5% or less interest rate, and 25-30 year amortization to have more accurate terms. My apartment loan is 4.375% with a 25 year amortization, as an example. The market standard for a Fannie/Freddie apartment loan has a 30 year amortization. And the debt is non-recourse.

Cap ex for an apartment community is significantly less than SFRs. The standard required reserves under the Fannie/Freddie apartment loan programs are $250-350 per unit per year. Many investors will carry higher reserves than that but still nowhere near SFR levels/needs.

Buying one 40 unit apartment community is a heck of a lot easier than buying 40 individual homes.  That's not up for debate.

Raising rents $200/unit would be a home run.  Do that on a 40 units community and you just made a $1 million profit (minus rehab).  

And you don't manage the rehab, the PM does it. And it's conducted by affordable and professional vendors who specialize in apartments. Flooring installed is under $1/sqft and painting is around $250/unit. The word efficiency does not do justice to the difference between apartment rehab/maintenance and SFR rehab/maintenance...it's using professional vendors who specialize in apartments, not contractors. And all the rehab is done at one location.

Regarding the refinance, it's easier, not harder to get your capital out with an apartment.  You get a construction/perm loan and finance the rehab.  There are also supplement loan features built into commercial financing that allow cash out once the property has been re-positioned.

The most important factor is the profit per property...profit per unit is not as relevant.  Many investors would rather have one 40 unit property that cash flows $6000 per month than twenty separate properties that cash flow the same.

There are lots of strategies to make a profit in real estate and SFR and apartments are both excellent.

Originally posted by @John Nachtigall :

For the SFH you are paying a PM 10%, so $7000 a month. For the apartments you hire a full time manager for $3500 or less a month plus some part time staff. Easy to imagine paying less than SFH.

-100 HVAC units vs 10

-100 roofs vs 10

-100 layouts vs 10

That seems logical. However, the fact remains that MFH typically sell at cap rates of 5-7%. That would be an extremely low return for a SFH, even accounting for a 10% PM expense. If expenses truly are lower for MFH (due to economies of scale) it would seem that such low cap rates are due to much higher selling prices, relative to rents. Am I missing something?

Originally posted by @Mike Dymski :

Hey Eric.  Well written post.

Change your debt terms to 75% LTV, 5% or less interest rate, and 25-30 year amortization to have more accurate terms. My apartment loan is 4.375% with a 25 year amortization, as an example. The market standard for a Fannie/Freddie apartment loan has a 30 year amortization. And the debt is non-recourse.

Cap ex for an apartment community is significantly less than SFRs. The standard required reserves under the Fannie/Freddie apartment loan programs are $250-350 per unit per year. Many investors will carry higher reserves than that but still nowhere near SFR levels/needs.

Buying one 40 unit apartment community is a heck of a lot easier than buying 40 individual homes.  That's not up for debate.

Raising rents $200/unit would be a home run.  Do that on a 40 units community and you just made a $1 million profit (minus rehab).  

And you don't manage the rehab, the PM does it. And it's conducted by affordable and professional vendors who specialize in apartments. Flooring installed is under $1/sqft and painting is around $250/unit. The word efficiency does not do justice to the difference between apartment rehab/maintenance and SFR rehab/maintenance...it's using professional vendors who specialize in apartments, not contractors. And all the rehab is done at one location.

Regarding the refinance, it's easier, not harder to get your capital out with an apartment.  You get a construction/perm loan and finance the rehab.  There are also supplement loan features built into commercial financing that allow cash out once the property has been re-positioned.

The most important factor is the profit per property...profit per unit is not as relevant.  Many investors would rather have one 40 unit property that cash flows $6000 per month than twenty separate properties that cash flow the same.

There are lots of strategies to make a profit in real estate and SFR and apartments are both excellent.

4.375% IS a better rate than I get for SFH (4.79%), though I get it at 80% LTV and 30 year amortization.

How long, on average, would it take you from starting your search to complete the purchase of a 40 unit MFH? With the same amount of capital as needed for the MFH purchase, I think I could buy, rehab, rent, refinance, and repeat with 30 SFH within a year or less. Also, at the end of that time I'd still have the same amount of (or more) seed capital on hand.

I accept that all you wrote regarding lower costs for MFH is correct. Though, I'd suggest fewer than 40 SFH are equivalent to the cost of 40 apartments (maybe 25-30 SFH?). I don't know if refinancing a complex is 'easier' than for a SFH, but refinancing a SFH is quite easy (with local lenders who do not require seasoning).

However, your point regarding the efficiency of MFH would only seem to highlight the fact that MFH cost a lot of money to purchase, as they typically only have cap rate of 5-7%, despite their high efficiencies. 

Originally posted by @Michael Swan :

Hi @Eric James,

I was really worried about being at the mercy of comps anywhere I invested. The Multifamily business model's primary valuation is NOI. Last, economies of scale were very important to me. With the 10 single family, I had 10 mortgages, 10 roofs, 10 insurance policies, 10 tenants I was self managing etc... eventually as I kept expanding it would have started to feel like another job. I already had 2 teaching gigs and did not want another job. Here is the real kicker. A few of these apartment complexes, I have already increased the NOI so much, I could refinance and take back all the money I invested in them in one year time from now. However, I will take 2-4 more years of cash flow and then refinance or 1031 Exchange for a larger complex. I am not at the mercy of comps. With single family (1-4 units), I am 100% at the mercy of comps.

You have certainly done very well Swanny!  Regarding having multiple mortages, insurance policies, I believe there are portfolio loans and umbrella insurance policies for having multiple properties. 

You say you have '...already increased the NOI so much, I could refinance and take back all the money I invested in them in one year time from now.' That is also common to the BRRR approach, except that all the initial investment can be recouped as soon as the rehab is done (if using a lender with no seasoning period, such as I use).

When you talk about being at the mercy of comps, I take it you feel that comps may fluctuate more than MFH NOI. That may very well be true. However, you also benefited greatly from your condos greatly appreciated, thanks to comps!

Hi @Eric James ,

We each need to pick our own path. I really like that I don't have any properties that I directly manage anymore. I don't have a key to the apartment complexes. I don't know any of the tenants, and I am happy with that. Plus, I am playing catch up now, because I chose to be a parochial school P.E. Teacher, I feel that I can be financially free quicker with true Multifamily. I am still really scared of the $200,000 equity I have sitting dead in my San Diego personal residence. I can't get my wife to sell, tax free and just rent until this entire thing comes crashing down. All the condos I sold here in San Diego and 1031 exchanged were bought FHA, low money down to people with low 600 credit scores and not much money in the bank.

Pretty scary!!

Swanny

Originally posted by @Eric James :
Originally posted by @Mike Dymski:

Hey Eric.  Well written post.

Change your debt terms to 75% LTV, 5% or less interest rate, and 25-30 year amortization to have more accurate terms. My apartment loan is 4.375% with a 25 year amortization, as an example. The market standard for a Fannie/Freddie apartment loan has a 30 year amortization. And the debt is non-recourse.

Cap ex for an apartment community is significantly less than SFRs. The standard required reserves under the Fannie/Freddie apartment loan programs are $250-350 per unit per year. Many investors will carry higher reserves than that but still nowhere near SFR levels/needs.

Buying one 40 unit apartment community is a heck of a lot easier than buying 40 individual homes.  That's not up for debate.

Raising rents $200/unit would be a home run.  Do that on a 40 units community and you just made a $1 million profit (minus rehab).  

And you don't manage the rehab, the PM does it. And it's conducted by affordable and professional vendors who specialize in apartments. Flooring installed is under $1/sqft and painting is around $250/unit. The word efficiency does not do justice to the difference between apartment rehab/maintenance and SFR rehab/maintenance...it's using professional vendors who specialize in apartments, not contractors. And all the rehab is done at one location.

Regarding the refinance, it's easier, not harder to get your capital out with an apartment.  You get a construction/perm loan and finance the rehab.  There are also supplement loan features built into commercial financing that allow cash out once the property has been re-positioned.

The most important factor is the profit per property...profit per unit is not as relevant.  Many investors would rather have one 40 unit property that cash flows $6000 per month than twenty separate properties that cash flow the same.

There are lots of strategies to make a profit in real estate and SFR and apartments are both excellent.

4.375% IS a better rate than I get for SFH (4.79%), though I get it at 80% LTV and 30 year amortization.

How long, on average, would it take you from starting your search to complete the purchase of a 40 unit MFH? With the same amount of capital as needed for the MFH purchase, I think I could buy, rehab, rent, refinance, and repeat with 30 SFH within a year or less. Also, at the end of that time I'd still have the same amount of (or more) seed capital on hand.

I accept that all you wrote regarding lower costs for MFH is correct. Though, I'd suggest fewer than 40 SFH are equivalent to the cost of 40 apartments (maybe 25-30 SFH?). I don't know if refinancing a complex is 'easier' than for a SFH, but refinancing a SFH is quite easy (with local lenders who do not require seasoning).

However, your point regarding the efficiency of MFH would only seem to highlight the fact that MFH cost a lot of money to purchase, as they typically only have cap rate of 5-7%, despite their high efficiencies. 

Shoot, nice work BRRRR'ing 30 SFR's per year. You don't need our feedback.

Originally posted by @Michael Swan :

Hi @Eric James,

We each need to pick our own path. I really like that I don't have any properties that I directly manage anymore. I don't have a key to the apartment complexes. I don't know any of the tenants, and I am happy with that. Plus, I am playing catch up now, because I chose to be a parochial school P.E. Teacher, I feel that I can be financially free quicker with true Multifamily. I am still really scared of the $200,000 equity I have sitting dead in my San Diego personal residence. I can't get my wife to sell, tax free and just rent until this entire thing comes crashing down. All the condos I sold here in San Diego and 1031 exchanged were bought FHA, low money down to people with low 600 credit scores and not much money in the bank.

Pretty scary!!

Swanny

I can relate to making concessions to a spouse. At least I only had to go so far as getting a 15 year mortgage (on a very low cost house) to keep my wife happy.

So you'r a PE guy! I used to teach Kinesiology to PE majors at University.

Originally posted by @Mike Dymski :
Originally posted by @Eric James:
Originally posted by @Mike Dymski:

Hey Eric.  Well written post.

Change your debt terms to 75% LTV, 5% or less interest rate, and 25-30 year amortization to have more accurate terms. My apartment loan is 4.375% with a 25 year amortization, as an example. The market standard for a Fannie/Freddie apartment loan has a 30 year amortization. And the debt is non-recourse.

Cap ex for an apartment community is significantly less than SFRs. The standard required reserves under the Fannie/Freddie apartment loan programs are $250-350 per unit per year. Many investors will carry higher reserves than that but still nowhere near SFR levels/needs.

Buying one 40 unit apartment community is a heck of a lot easier than buying 40 individual homes.  That's not up for debate.

Raising rents $200/unit would be a home run.  Do that on a 40 units community and you just made a $1 million profit (minus rehab).  

And you don't manage the rehab, the PM does it. And it's conducted by affordable and professional vendors who specialize in apartments. Flooring installed is under $1/sqft and painting is around $250/unit. The word efficiency does not do justice to the difference between apartment rehab/maintenance and SFR rehab/maintenance...it's using professional vendors who specialize in apartments, not contractors. And all the rehab is done at one location.

Regarding the refinance, it's easier, not harder to get your capital out with an apartment.  You get a construction/perm loan and finance the rehab.  There are also supplement loan features built into commercial financing that allow cash out once the property has been re-positioned.

The most important factor is the profit per property...profit per unit is not as relevant.  Many investors would rather have one 40 unit property that cash flows $6000 per month than twenty separate properties that cash flow the same.

There are lots of strategies to make a profit in real estate and SFR and apartments are both excellent.

4.375% IS a better rate than I get for SFH (4.79%), though I get it at 80% LTV and 30 year amortization.

How long, on average, would it take you from starting your search to complete the purchase of a 40 unit MFH? With the same amount of capital as needed for the MFH purchase, I think I could buy, rehab, rent, refinance, and repeat with 30 SFH within a year or less. Also, at the end of that time I'd still have the same amount of (or more) seed capital on hand.

I accept that all you wrote regarding lower costs for MFH is correct. Though, I'd suggest fewer than 40 SFH are equivalent to the cost of 40 apartments (maybe 25-30 SFH?). I don't know if refinancing a complex is 'easier' than for a SFH, but refinancing a SFH is quite easy (with local lenders who do not require seasoning).

However, your point regarding the efficiency of MFH would only seem to highlight the fact that MFH cost a lot of money to purchase, as they typically only have cap rate of 5-7%, despite their high efficiencies. 

Shoot, nice work BRRRR'ing 30 SFR's per year. You don't need our feedback.

Too bad I don't have half a million in capital so I could actually do it.  ; )  I'm stuck small timing it, 4 in the last 6 months. My limitation is the capital, but I'm getting there.

But that's part of my point: with the kind of capital it takes to buy large multis you can do a LOT of anything.

It's about growth/scale. Unless you can buy 100+ SF's in a small 5-10 mile radius it is hard to grow and scale. Think about buying 1000 units in Multi-family. That would be 5-200 unit buildings or 10 - 100 unit buildings. Try doing that with SF's. 

The other thing is the numbers that most people use on singles is not realistic. Most people don't account for all the little expenses, like you do in a MF deal. I have owned nearly 100 SF's at one time and understand the difficulty of that and have seen that as you obtain more units, spread out your cash flow/building actually goes down. 

I look at return, but I also look at the best business model. For me the time and effort it takes to make $200-$400/mo on a house is not worth it, even though I can get a 15%+ CoC. I'd rather make $20k/mo on an apartment at only 9-12% CoC

Originally posted by @Eric James :
Too bad I don't have half a million in capital so I could actually do it.  ; )  I'm stuck small timing it, 4 in the last 6 months. My limitation is the capital, but I'm getting there.

But that's part of my point: with the kind of capital it takes to buy large multis you can do a LOT of anything.

Maybe that one reason is good enough for you then. Finding investor capital for MFH is much easier. Instead of getting capped at 10 houses by your bank or chasing down private and hard money lenders with 10-15% interest rates, you can raise capital to buy MFH.

What a great discussion! I'm just getting started and have cashed out my equity ($250k) and am current at the fork in the road.

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