The Impact of Vacancy on Single Family and Small Multifamily vs.

6 Replies

I always tell people when you lose a tenant in your single-family rental, you are 100% vacant, and when you lose one tenant in your 100 unit complex, you are 1% vacant. I was reminded of the power of diversification both this year and last with my one remaining Four-plex.

That red ink you see is the cost of tenant eviction. It was enough to bring my average annual COC% from 12% to 8%. A reduction of 25%. Ouch

Conversely, I would have to have 25 evictions on a 100-unit apartment syndication, or 75 on a 300-unit, to match that loss in return. This is pretty much impossible on a stabilized apartment.

Now I am contemplating selling the fourplex, as I was just gifted a $3000 punch-turn on my last tenant leaving. Again enough to reduce my return by 25% off the historical average.

Don’t forget to include the power of diversification and the economies of scale when evaluating your real estate investments. The speedbumps are much larger on the smaller stuff, and it is one of the reasons why I have been making the shift to apartment syndications.

I think of it this way:

10 SFH's with one empty = 10% vacancy.

A 10 unit complex with one unit empty = 10% vacancy.

Potaytoh, potahto.  In terms of vacancy rates only, I find little difference between the two rental types.  There are other Pros and Cons to weight when comparing MFs to SFHs, but I don't see vacancy as a determining factor.

@Erik W. I hear you and we can agree to disagree. I think it is a determining factor because it is all related when I consider the logistics. I think of the 10 roofs, 10 property tax bills, 10 insurance bills, and 10 different commutes to achieve that 10% vacancy, which to me = 10 times the headaches. People achieve huge success with both, but it's nice if you can fit it all under one roof. At the very least, it makes for healthy debate.

@Rick Martin and @Erik W. I agree with both of you.  If I ONLY own a single, single family rental, than I go from 0-100% vacancy.  But that also takes no factor of time.  Just because I lost a tenant this week, in a snap shot view I might have 100% vacancy, but when it is filled in under 2 weeks, my vacancy is really 3.8% for the year, not 100%. If I turn the unit every other year, my vacancy is 1.9% blended over the 2 year period.  

The same can be said for large multifamily.  Most sellers will prop up occupancy by offering low rents, so when I buy from them, the property is 98% occupied, based on current rent roll.  But that doesn't mean I am going to be underwriting a property that has historically been 90% occupied in a 90% occupancy submarket as being able to maintain 98% occupancy just because the snap shot today says that is the case.  Or, if I look at it unit by unit, I am not "paying" for the vacant units, since they are 100% vacant today.

But I do agree Rick, that multiple roofs, tax bills, driving time, etc is something I don't want to spend my time dealing with anymore.  But I also got to where I am today, financially and personally, because of single family rentals that overwhelmingly do well from a cash flow perspective and appreciation.

I don’t think comparing a 10 unit apartment building to 10 single family homes is fair. A 10% vacancy rate on a portfolio of SFRs would have the same impact as an apartment building.

I think the real issue is with many investors who are in coastal cities is deciding if they should invest locally in a SFR or invest in a lower cost area and purchase a small multi-family.

In other words, I can buy a SFR for $350k by me in NY or I can purchase a 6 unit in another market for $350k. That would be a true apples to apples comparison. I know local investors whom have 2-3 SFRs in my area who are hurting now as some tenants are slow/no pay them.