Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
12y
This is a close call for me between A and C. I like A, because it is simply one property to buy and manage, and could have the potential of cash on cash returns in the 20's%.
Still, I'm going to choose C, because I'd likely attract higher quality tenants at higher rent, even though the net income might not be as high. However, the individual homes would be more liquid and offer more flexibility for selling or borrowing against down the line. I'd also think that they might have a better chance of appreciation than the small multi-family.
Insurance Agent · 30043, GA · Member since 2008 · 9 posts · 2 votes
12y
I like this question.. Lets see.
a. Multifamily home....cold be a good investment, but that's just the down payment and you have to hope that you have tenants in the home, to pay the mortgage.
b. Rental Home.... Maybe a valuable option if the home doesn't need any work...
c. 5 homes... then you have to fix all of them up and with a mortgage. NO way.
Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
12y
This is a close call for me between A and C. I like A, because it is simply one property to buy and manage, and could have the potential of cash on cash returns in the 20's%.
Still, I'm going to choose C, because I'd likely attract higher quality tenants at higher rent, even though the net income might not be as high. However, the individual homes would be more liquid and offer more flexibility for selling or borrowing against down the line. I'd also think that they might have a better chance of appreciation than the small multi-family.
Insurance Agent · 30043, GA · Member since 2008 · 9 posts · 2 votes
12y
Jon...I like your C answer I thought about that as well... but I still keep thinking about getting people in the homes that was my only drawback for not chosing C.
Investor · Dallas, TX · Member since 2013 · 619 posts · 128 votes
12y
Option C for me... I would use the cash-flow from the 5 properties to pay down the loan on one property at a time giving me the option to re-leverage the equity in that property to acquire more! Or I could seller finance as an exit strategy. Or lease option. More options available with multiple single family homes...
Real Estate Investor · Kirkland, WA · Member since 2012 · 480 posts · 116 votes
12y
I like C for some of the same reasons Jon Klaus mentioned, but under two conditions based on Shannon Ashby's concerns. Buy them one at a time. Get one in operation, then buy the next, etc. Or, make a deal with the seller so that I could buy them as a package deal, but hold off on payments until I have them in operation.
Investor · Philadelphia, PA · Member since 2012 · 46 posts · 11 votes
12y
C. It's easier to find 5 decent rental houses with asking prices under 100k than it is to find a great deal on a single large $500k multi-family (from my experience). The returns are all based on the deals and the leverage is similar. 5 smaller properties is more liquid and the risk is lower since finding 1/5 bad apples is better than finding 1/1 bad oranges. Yes yes you can mitigate this risk with insurance and due diligence but that's just my personal preference.
Investor · Napa, CA · Member since 2011 · 29 posts · 6 votes
12y
C is great, but I am now looking for A's, especially a mobile home park-type multi-family. The cash flow from the right MHP is my longer term goal. It's a step I am a little leary of but am doing more research on a regular basis and will step in when I find the right one. Especially a seller-financed park (if all the other criteria are met, of course).
Investor · York, PA · Member since 2011 · 34 posts · 2 votes
12y
IMO the right answer involves leverage, so B is out!
First I'd go with option A. The advantages are one location, using the power of multiple units for simplicity and to potentially get a 'one stop shop' discount with property managers and/or contractors. I would also think that because this is one financing transaction, the overall cost of the loan and associated fees would be lower than buying 5 individual properties w/ $20k down on each. Plus, the logistics of buying one building may be a bit easier: one loan, one appraisal, one insurance policy, etc.
With option C, you'd be going through the same process five times and it would take a lot of time for all of the deals to come to fruition, settle, and figure out the leases, etc etc. You'd be dealing with 5 different sellers, each presumably with their own challenges. One potential advantage to option C is that if you have not already hit your bank's maximum loan limit, you can get awesome amortization (30 yr. fixed), whereas the apartment complex would be a commercial loan.
Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
12y
My answer: C
I'd buy 8 houses at $32,000 each with 20% down and finance the rest. I don't think 5 houses with $20,000 down payment each is realistic, because you aren't including money for closing costs and lenders require you to have reserves for 6 months PITI payments when you go over 4 mortgages.
Down payments = $6,400 * 8 = $51,200
Closing costs = $1,500 * 8 = $12,000
Subtotal: $63,200
Reserves in order to get mortgages (6 months PITI): $16,400
Amount for repairs on homes to get rent-ready: $20,400 (About $2,500 per home)
Also another consideration is that if someone doesn't already own their own home, or wouldn't mind moving, they could use a FHA at 3.5% and buy a duplex or triplex and not have to put down 20%.
Nashville, TN · Member since 2013 · 10 posts · 5 votes
12y
C.
I think buying five rental properties at, lets say, 60K w/a 20K downpayment would get me a decent return. If I could rent those properties for 800/mo I'd make my money back in 2.2 years and pay off the loan in 6.5. If at any time before that the property appreciates, I could sell the properties for a profit.
Mansfield, TX · Member since 2013 · 207 posts · 26 votes
12y
@Jay Oldham For those of us who havn't purchased our first rental yet, could you explain a little more how you would pay off 5 leveraged properties in 6.5 years? Even if you are using the cash flow as an extra payment to paydown the loan that seems very very fast.
Investor · Santa Barbara, CA · Member since 2013 · 658 posts · 315 votes
12y
C all the way for me. Interest rates are low and now is the time to leverage so B is out. If I already had 8-9 SFR's with loans and had an extra 100k then I would go for plan A.
Like Dawn said, you couldn't use 20k for each down payment though. I am in the process of doing this exercise in real life. I am finding that its more like 12k down + closing costs + rehab to get to 20k cash spent on each property.
surrey, bc · Member since 2014 · 15 posts · 0 votes
12y
A) This would probably be my choice as long as i had money on the side for unexpected costs, minor repairs etc.
B) I like to use leverage to maximize my returns. I would NOT do this.
C) This option might be something I would consider in another area such as saskatchewan. Or somewhere with low closing costs. Property purchase tax here in BC is very costly upon buying. Not to mention 20,000 in my area is not a lot of money to put down. ALSO with more houses comes more repairs, unexpected costs and higher management fees. There are certain demographics where i could prove this model to be more lucrative. However NOT where i live.
Rental Property Investor · RTP – NC, Philadelphia – PA · Member since 2013 · 11 posts · 0 votes
12y
If the numbers work, I'd go with A. It presents a good balance between distributing vacancy risk and consolidating management effort. The other two options seem to me to be on either extreme side of the equation.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
Well, 500K down would likely be on a 2M multi, that isn't small to me. 6 Luxury type units, I don't think so, vacancy would kill your return, maintenance? Probably need a full time guy, lots of labor in this one too. All in one spot is nice, but all your eggs are in one basket too. Could be 40 or 80 units, way too much brain damage. I'll pass
One property for cash, nah, maybe 3% appreciation, you'll never live off that.
Ah, C there's the solution, leveraged, tenants buy them for you.
As to dealing with 5 sellers and closing expenses, close to the same as A, and A could be a nightmare to take down with due diligence. Much rather deal with 5 homeowners than inspectors, engineers, ordinances the seller's attorney.
SFDs are marketable as your depreciation results in less tax benefits in about 7/8/9 years, you can spin them off easily and reinvest at a new basis, still using equity if you want to. Financing is easier, you can tap future equity easily, pledge on property to acquire another new property. Flexibility and liquidity are important in any investment, IMO. :)
Investor · Bellingham, WA · Member since 2010 · 308 posts · 230 votes
12y
I have to go with @Derek Carroll's choice of A... plus. To all those who like C ask yourself this; Where do most apartment investors start out and why did they become apartment investors?
Syndicator and Fund Manager · Victor, NY · Member since 2012 · 760 posts · 345 votes
12y
@Giovanni Isaksen hit it right on the head. My answer stays the same regardless of this being your first real estate investment or if you already have a portfolio of single family homes. At this level you're looking at enough units to have a full time property manager or management company so you're looking at relatively passive income. Also, if you buy right (meaning that there has to be some sort of value add or signifigant cash flow) then you have leverage to trade up to another one in a few years.
I'm contacted all the time by investors who want to use this same strategy. If you look around at any of the self made (not inheriting) developers who are big in your area they likely started by owning many singles, then small multis, then big multi's ect...
Leverage is your friend if used wisely. Then if you also purchase wisely you can have a very successful run in as little as 10 years, all starting with $100K.
Investor · Vincennes, IN · Member since 2013 · 223 posts · 108 votes
12y
I would choose option A with a caveat. The first $20,000 I would use to hire a securities attorney and do a $500k to $1mil fund raise. That would then be combined with $2-5 mil leverage to purchase a few medium sized multifamily or manufactured housing communities.
The remaining $80,000 would be my acquisition fee. It pays for as Bill said all the "brain damage" involved.
Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
12y
Derek and Giovanni, I would agree with you, if the multi was bigger and could sustain dedicated staff. At $500K, it's likely to be 10-15 units, and not all that efficient to manage. Not that the singles wouldn't be either. I agree that typical progression for advanced investors often is commercial (including 5+ residential).
This obviously is going to be a personal choice, based on each investor's goals, temperament, trajectory, and resources. I would rather line up my ducks to take down bigger commercial that would be more efficient to manage. Say, get to 25 SFR's with big equity, and then lever up to buy a 100 unit, where I never talked to tenants and rarely even visited the property. Yeah, this is an outlier track, but that's the beauty of the question, all 3 answers are right for different people, for different reasons.
I say this with trepidation, because I'm going against one of my mentors, William Nickerson (and you guys), but my situation is different than many, with a healthier W-2 and equity outside of real estate. And I did say C just edges out A, mostly because of liquidity.
I would choose option A with a caveat. The first $20,000 I would use to hire a securities attorney and do a $500k to $1mil fund raise. That would then be combined with $2-5 mil leverage to purchase a few medium sized multifamily or manufactured housing communities.
The remaining $80,000 would be my acquisition fee. It pays for as Bill said all the "brain damage" involved.
Nashville, TN · Member since 2013 · 10 posts · 5 votes
12y
@Bill Mitchell
I did that math in my head and it's wrong. That's why they make calculators :). I checked it in the Bigger Pockets investment Calculator and here's where I messed up in my considerations:
Rent Amt: 800
Years Held: 6.5
800 x 12=9600 x 7 = 62400
I didnt take into consideration the loan costs, of the remaining amount. I said putting 20k down on 60k houses. there's still a 40k loan. Sorry if I mislead.
Austin, TX · Member since 2013 · 103 posts · 19 votes
12y
Good question. Depends on the goals of the buyer, their risk tolerance, as well as his/her current financial situation.
All things being equal, I'd go for C- as the individual houses can be sold off in pieces in case their financial picture changes. Plus it builds a nice starter portfolio and there will be steady income--as not all 5 homes will be vacant at any one time.
Investor · PA · Member since 2013 · 1k+ posts · 602 votes
12y
With 100k, I would buy 5 to 10 houses in total with cash over the course of a few years, fix them myself on the weekends, and then rent them for 650-1000/mo a piece. After a few years, if things are going good, I might try and leverage the equity to buy some more.
We are doing our 2nd investment fund with multiple properties in it. Will probably start a 3rd this summer. Much easier than raising for a single property at a time. Not for the weak of heart, though:)