Like most of "louder with crowder" -- this is a very controversial topic.
I'm on team Grant Cardone ... investing in single family or small multifamily should be short-term, value-add flips that create wealth for investment in larger multifamily properties.
Warren Buffet has said multiple times that he is only purchasing SFR right now, and believes t to be the best asset class as the market has turned to a high demand for MF. I'd say that's reason enough to at least think of changing your mind :)
This topic is very market specific. Some asset classes do better than others in certain areas.
However, I share your same sentiments with SFR vs 2-4units MFs.... especially in a Rent Control states/areas like mine in CA ( Los Angeles). I own both types. My tenants on my 4plex are more high maintenance than my SFRs. I am also able to get better quality tenants on my SFRs.
MFs are capped at 4% rent increases, while SFRs are capped 10% annually. My 4plex tenants are way under market rent, and because of Rent Control, i cant just end their lease at anytime without a $20-30k payout. I also pay for water utilities on my 4plex which reduces my cap rate even further. My 4 SFRs are cashflowing so much more that my 4plex... easier to rent... plus tenant pays all utilities.
@Isaac Johnson there is no right or wrong as long as you have the right team around you. The fact that you are actually doing it vs pondering is great.
IMO, the best number of rental units is 1. Certainly, 1 property with 100 units is working towards the same idea from a different angle. However, the point is, more units equals more management. Now, if you earn a piece from each tenant, then of course the more units the better. All depends on who you are and what you want to do.
I had two single-families and recently swapped them out for two duplexes. I increased my net worth a bit (with some repairs) and increased my rent roll significantly. I am in this space because, I can currently get duplexes cheaper than SFR with the same or better rents. If that were to change, then I would change too. As far as the management of more tenants, for me that all comes down to the physical condition of the property and tenant selection. Well-kept properties are easy. Easy tenants are easy.
I think all that really matters is purchasing a good deal. The rest will work itself out.
@Isaac Johnson don’t change your mind your rite. Multi family is key. Flip single family hold multi family. Once your experienced move on to commercial properties.
@Scott Kibby I would rather buy a multifamily that’s not located in a SF neighborhood, but I’m sure you could make it work, I actually need to look into that. Interesting, thank you.
@Kyler Cook yeah I agree that single family is probably easier to get a better deal, but unless you want to rent out rooms while living there, you need the money for a larger downpayment, which I don’t have (yet)
What do you mean by a larger down payment? That’s arbitrary depending on the kind of homes you’re buying, and what kind of strategy you’re using. If you buy 10% down conventional a 100k property, you’re in good shape.
The biggest barrier to entry in larger MF apartments is the ability to qualify for the financing. A very small % of new investors are able to come up with 25% down on a multi million dollar purchase and still meet the net worth and liquidity requirements post settlement. This is why almost all large apartments are syndicated. If a single investor could take down a multi million dollar deal by himself then he would but it’s rare.
Even if you make decent money if you are not Accredited then there will be a smaller % of deals you would be qualified to invest in legally.
Limping in to apartment investing thru smaller deals will be the only way you can participate when you aren’t accredited.
I agree that a 2-4 multifamily building is a great place to start. I've compared my duplex that I've owned for 5 years to my syndication investments and I'm getting a 2x on capital in both assets. My cash flow is stronger with my duplex, but I'm also managing my duplex myself. It's easy to manage this particular duplex because its a nicer property, larger apartments allow me to scale my portfolio. I'm ok owning a few single family rentals and duplexes, but I limit that because good management is hard to find.
@Isaac Johnson - I'm not going to change your mind or even disagree the 2-4 multi is the right strategy for you and others. I do agree with some others that it just depends on your goals. I own a handful of SFRs and intend on buy 2-4 more over the next few years. But my goal is not to build a large portfolio. I'm in REI to diversify my overall investment portfolio and 8-10 SFRs will do that for me. Best to you on your REI journey!
I am going to go in a completely different direction here. For a newbie , the best investments, in my opinion, in order
1. 401k/IRA broad market (S&P 500 or total market) index funds. Historically grow at 10% with dividends reinvested. Tax deferred so you get all the compound interest. Instantly liquid (although I would advise buy and hold for 40+ years). Can be bought free in small increments. Cost of ownership is a few cents, literally. Require no knowledge or skills of any kind and no maintenance or vetting. One downside is that you can only do $19k a year. The other is that it generates no immediate cash flow. But since the objective is to build wealth, not cash flow that is not really a con.
2. Syndications: You get all the advantages of commercial real estate without needing skills or knowledge. For a newbie who has no idea how to vet, buy, staff, maintain, or dispose of a commercial property syndication provides an opportunity to invest in those properties. You even get the tax and cashflow. The con is you are paying fees and a promote to the experts who are running it. You also have minimum standards to invest, you need to be accredited. And most importantly you have to pick the right sponsors, so you do need knowledge in how to pick the right partner.
3. Direct Investment (less than 4). I honestly dont think there is enough difference between SFH and MFH (<4) to make a big difference. In general they both give cashflow and appreciation. They both have great financing available. They both are scaleable to a level that most people will never exceed (50% of landlords have 1 property, 25% have 2-3). Cons are illiquid, require large amounts of capital (relatively), require knowledge and/or ability to run, and maintenance/capital improvements mean a reserve fund is required. Also requires at least moderate credit.
4. Commercial Real Estate: Objectively better than smaller units (<4). better scaling, cashflow, appreciation etc. You are less at the whim of the market, they are valued on cap rate not market trends so you can force appreciation easier. Not great for the newbie because they have little to no experience. Even larger capital and reserve funds required. Financing is harder. Analysis of deals is harder. Ability of a newbie to syndicate a deal legally is very hard.
5. Wholesaling/flipping/anything you buy on late night TV: I am not going to get into wholesaling. There are legions of posts arguing. In my opinion anytime you need to find someone who is "desperate" for your strategy to work it is not something that fits my moral compass. Flipping requires capital, experience, ability, skill, and some luck. How can that be prescribed to a newbie.
Just based on the fact that 2 to 4 units are considered residential so that you are able to "house hack" with a 3.5% down loan (can even include renovations in the loan) makes 2 to 4 units the best property type to start with.
If that is your intended focus and you don't see yourself wanting to scale or expect to scale to larger apartments. Then do what is comfortable for you!
Everyone has a good point and I see where there coming from. For me I will start at 5 units or more due to the benefits you get compared to a four unit or less. You have to start at your comfort level.