Is it possible to scale Single Family and small MF???

33 Replies

I had a great conversation with a friend yesterday who owns over 100 units, all of which are 1-8 unit properties.

He told me he is looking to scale up into larger multifamily properties 40-100 units. His claim was that he could not scale. He has a full time 'handyman/contractor' on staff , and all of the properties are within a 20 mile radius. However, the expenses of all of those small properties, including turnover and rehab just does not produce enough cashflow.

What do you all say? If MF the only option? Or do you think he can scale buy more of the same kind of properties?

I have invested in SFR, and am passionate about MF, so I encouraged him to go for bigger properties.

@Yonah Weiss people make and lose money in every aspect of REI one could care to mention. Many do it with SFR and duplexes. It is hard to beat having as many doors as you can reasonably get under one roof. At the same time you may have a longer road ahead at exit time.

Nothing beats MF for economy of scale if you are the LL; but today MF is so ballyhooed by financial media-even radio and TV-it is hard to find decent MF at a price that makes sense. 

Rents just have not been keeping pace with prices per door. Given all that I'm looking for my next MF deal. ;<)

It's a long term play for SFH and small MF. You can scale but the payoff is not in cashflow it's in appreciation, principle reduction over time and depreciation. Typically 10 years or more. This is how the institutional investors and REITS play the game.

They only other way to scale and create significant cash flows from day one with smaller properties is to buy cheap and owner finance and or rent to own on the back end or lease option and rent own on exit.

Originally posted by @Yonah Weiss :

I had a great conversation with a friend yesterday who owns over 100 units, all of which are 1-8 unit properties.

He told me he is looking to scale up into larger multifamily properties 40-100 units. His claim was that he could not scale. He has a full time 'handyman/contractor' on staff , and all of the properties are within a 20 mile radius. However, the expenses of all of those small properties, including turnover and rehab just does not produce enough cashflow.

What do you all say? If MF the only option? Or do you think he can scale buy more of the same kind of properties?

I have invested in SFR, and am passionate about MF, so I encouraged him to go for bigger properties.

 Yeah after awhile it is the best option if you want to continue to grow. 

Also Most people mess up understand what capex costs on smaller properties, especially SFHs. A simple 5-10% of rent does not cover cap ex, especially on cheap rentals. 

Other issue is the logistics. It is not fun. 

Turnover should be the same. 

You see a lot of owners start in the SFH or small MF space and then grow to much larger properties.

Larger properties make it much easier to scale and create systems. The more doors you can get under one roof, the better. Our 89 unit deal has a full time maintenance guy. The numbers work much better when all of the doors are under one roof. Although some people do well in the SFR space, my opinion is large MF is the best way to scale.

It sort of depends on what 'scale' means. If the focus is on cashflow, the focus might need to shift to full commercial (not MFR). You can receive cashflow and not need to staff any maintenance.

If the focus is on adding value and not market appreciation, that tends to be labor intensive.

If the focus is on appreciation with just enough cashflow to keep things ticking over, then different again (SFR up to 4 units).

So, there are lots of solutions and they can be wrong if the investor is not really clear about what they want and what they are prepared to give up.

So Warren Buffet's Group (Invitation Homes) own 82,000 SFH. He bought at a discount during the crash and originally was only going to hold for 5 years. They still own them 7-10 years later. You can scale anything it just depends on your own definition of scale. Is your plan to hold property forever SFH works great. Cash flow on sfh should be greater than MF per door. Example cash flow per door on MF might be $150-200 while sfh might be 400-500. Selling a sfh is much easier then a MF. There are benefits to each. Scaling is all about perspective.

This debate always reminds me of what came first the chicken or the egg. I do understand the arguement of as many doors under one roof as possible, especially when you are investing from a distance. Personally I like sfh right now simply because multi family is so high per door. I also find them easier to manage and the cash flow is much better. Do they take longer to acquire more doors? Absolutely. Like someone said previously all depends on your definition of scale. 

Originally posted by @Bjorn Ahlblad :

@Yonah Weiss people make and lose money in every aspect of REI one could care to mention. Many do it with SFR and duplexes. It is hard to beat having as many doors as you can reasonably get under one roof. At the same time you may have a longer road ahead at exit time.

Nothing beats MF for economy of scale if you are the LL; but today MF is so ballyhooed by financial media-even radio and TV-it is hard to find decent MF at a price that makes sense. 

Rents just have not been keeping pace with prices per door. Given all that I'm looking for my next MF deal. ;<)

 Thanks for your perspective Bjorn. I agree it is becoming increasingly harder to find good MF deals. Where do you look to find you deals? Any websties? Local brokers? Driving for dollars? 

@Greg Dickerson he is looking for cashflow much more than appreciation. I understand how the institutional players who are buying up SFR, they are in the long haul, and do not need to produce significant dividends to investors.

Originally posted by @John Corey :

It sort of depends on what 'scale' means. If the focus is on cashflow, the focus might need to shift to full commercial (not MFR). You can receive cashflow and not need to staff any maintenance.

If the focus is on adding value and not market appreciation, that tends to be labor intensive.

If the focus is on appreciation with just enough cashflow to keep things ticking over, then different again (SFR up to 4 units).

So, there are lots of solutions and they can be wrong if the investor is not really clear about what they want and what they are prepared to give up.

You're right, there are a lot of solutions, but his main focus is the cashflow. When you say "full commercial (not MFR)" do you mean more like NNN? That clearly seems like a great way to buy cash-flowing properties, but there is another aspect of MF that a lot of people focus on which is 'value-add' or forced appreciation. That is usually much harder to do on commercial properties, especially when there are long term leases in place.

@Yonah Weiss

I was under the impression there are quite a few investors out there that starter with single families and moved into large multifamilies. That is personally what I am in the process of. I have not gotten "large" yet. I do however have a 16 unit and I'm closing on a 8 unit property in a bit. All of the cash used was from the profits I've received from the single families.

I don't know what your friend is doing specifically. I just simply buy crack houses in decent enough neighborhoods (c+) where people still feel comfortable living. I'll typically be all in for 60% or less. So on a 120k house, even holding it as a rental for $1,100/month, I'll pull out a good 30-40k and still cashflow upwards of $300/month per door. I'll then hold it long enough to flip a few more houses in the neighborhood, indirectly bringing the values of the other houses up. In 5 years instead of refinancing, I plan on selling them and then using all of the equity I have to get into what I would consider larger multifamilies.

Maybe I'm missing something, but that seems like scaling to me. Starting with a tiny little house and turning it into a large apartment complex over the long run.

@Yonah Weiss would your 100 unit owner friend consider selling the units and then using the equity as a down for a larger MF maybe as a 1031? We own 15 units and that's what we are considering doing right now in order to scale up.

SFR doesn't scale well at all.

it doesn't scale in transaction - one asset per transaction 

it doesn't scale in infrastructure - insurance, legal, title all must be done per asset

it doesn't scale in property managment - you have 100 units in one city, it's either 100 short drives, or 1 drive. Not to mention you can negotiate a lower percentage as you provide more business. Literally economies of scale to your benefit 

it doesn't scale in lending, most banks will lend easily on large MF, but there are fewer who will do a portfolio loans. Especially when the assets are scattered geographically AND the terms will be inferior

It took me a little while to figure this out. I own a couple SFR but it's unlikely I'll buy more going forward. If you were buying bulk SFR in 2014-2015 when prices were heavily discounted then that makes much more sense, in this more normal market environment multifamily is the way!

@Yonah Weiss as others mentioned there are people who own thousands or hundreds of houses. It is hard to scale to that level one at a time, so often people are buying portfolios. There are old landlords today who own a hundred houses and want to get out of the business, so they want to sell the portfolio. Just like it is hard to buy one at a time, it is hard to sell one at a time in that volume. 

People who say houses cannot be scaled or that there is no economy of scale in owning large quantity of houses are just incorrect. The more you own of anything (stores, restaurants, houses, hair salons, whatever) there is a benefit. 

The advantage of scale is two fold. You can deploy the same system across many locations and you get volume purchasing power. 

Some people say they would rather own one apartment building over a bunch of houses. The risk there is what happens when a singe event hits your apartment building. That event could be fire, murder, storm, economic changes or anything that severely affects the location. When you have houses or apartments distributed across multiple locations, you reduce location related risk. 

@Yonah Weiss as others have mentioned, if cash flow and scale-ability are the goal then SFR is definitely not the asset class. I see SFRs as little 7-11 convenience stores. You need to run it and put in all the work to squeeze out a tiny margin and you need a lot of them to make anything substantial. I started in SFR and got up to nearly 60 quality homes. I come from a corp background and did everything possible using tech, software, etc to make it efficient. Nearly impossible. On top of that all your expenses on a per unit basis are nearly double that of multifamily from insurance, capex, etc. The only positive is tenants tend to stay longer term. SFR is a great play in recessionary markets as a store of wealth but a terrible and risky play in a late stage cycle. All risk and very little upside or exit strategy.

@Yonah Weiss Id say it's hard to scale right now in small MF and SFH but if you were buying from say 2010-2016 it was a lot easier. There's just not buckets of homes to be bought en mass anymore. It also depends on your market. For example in my market, northern NJ, scaling was always a bit more difficult because the housing stock is generally very old requiring a lot of repairs and upkeep is more intensive as well. Not to mention the fact that prices are much higher here with duplexes starting from the high 200s-400s these days and still relatively expensive versus other areas back when the market was lower . So scale is less relevant to me in terms of units I focus more on cash flow rather than how many doors I have in total. I'd tell your friend to just focus on building cash flow and equity without regards to how many doors it takes to reach his goal.

@Yonah Weiss

If you desire better success with SFH then you need to model the same benefits you can get with MF. Buy more houses close together in the same neighborhoods, use the same materials and finishes in all for simplicity, negotiate deals with subs based on getting all your work, not just one house, negotiate better financing terms using a blanket loan on your whole portfolio with individual releases worded in, etc. With 75-100 SF homes you should be able to hire a full time bookkeeper/property manager, handyman and sub the rest out while you quarterback the team.

The biggest benefit of MF when you have enough units is that it's a business that supports itself and a lot of the savings you can get goes to the bottom line. The way large MF is valued is the major reason people want to buy it now due to being able to find a deal where you can force an increase in rents thru some combo of value add or better more efficient running of the property. With an increased NOI your MF value goes up and its independent of what any other MF complex near you is doing. You simply don't have that option in SFH when you property value is more closely tied to the others in the neighborhood.

The problems with MF more recently are that the prices per unit have begun to approach the cost for lower end SFH/town houses in many areas and it's starting to dilute the benefit MF used to have.

Without a bigger spread between cost per unit and rents, MF will begin to become less attractive as it will not have the cashflow to afford the additional overhead required to manage it day to day.

When a MF property has changed hands 2-4 times in the last 10 years there eventually not be enough meat left on the bone for the next guy to do any value add and then those properties will be selling off cashflow alone.

For a small owner it is also difficult to qualify for the financing to buy a 100 unit deal without doing some kind of syndication, which will dilute your ownership %, so you get a smaller slice of the big pie. Don’t misunderstand what I am saying here. The loans are available and the terms are reasonable but you have to qualify.

Fannie Mae basic requirements want you to have a net worth equal to the loan amount and also have at least 10% post closing liquidity. Not a lot of individuals sport this kind of balance sheet

Originally posted by @Brock Mogensen :

@Yonah Weiss My first deal was a duplex then the 89 unit. I realized the best way to scale REI is more units under one roof.

That's awesome. I totally agree. On to bigger and better right?