Need Advice: Buy more SF Homes or Jump Into Multi-Family

Real Estate Agent · Highland, UT · Member since 2015 · 407 posts · 272 votes

10y

Well you have the track record to open up your options. I think it all depends on your risk tolerance. I work with some investors who stick to fourplex's or less because they can stick with traditional fixed rate loans. Once you get into small apartment complexes the financing changes to commercial financing which typically has adjustable rates after a certain time.

I might be in the minority here but I also set a nice amount aside for my 401k to help be more diversified even though real estate is my first love.

2 Reply

Chris Erwin

Investor · Draper, UT · Member since 2015 · 193 posts · 48 votes

10y

@Cory Jones I think it's great you have been able to find success in the Memphis market. I too live in Utah, but invest outside of Utah in areas such as Birmingham, AL and St Louis, MO. I don't see the need to diversify outside of real estate necessarily, but diversify in the areas that you hold properties. This is one of the main reasons we are in two markets currently. I love Utah and living here, but I wouldn't recommend you invest in the real estate market here, because you can find much higher returns outside of Utah. Just my two cents. Happy investing.

2 Reply

Pamela Starnes

Rental Property Investor · Culver City, CA · Member since 2015 · 61 posts · 41 votes

10y

Welcome to BP Cory! Congratulations on getting off to a great start the past few years and being at a point to have great options to consider. I am a LA based investor but also looking at Memphis as an area to buy further investments. I am solely interested in MFR's (which is what I have in LA), but I'm getting in touch with local contacts in Memphis to figure out if MFR investing makes sense for me there. I'd love to hear from you about what areas of that city you are finding work well or not so well for you or what other pointers on Memphis you could provide. I have family there as well that I visit periodically and lived there myself for 2 years many years ago, so I do have a decent grasp of the layout and neighborhoods. I'll send you a PM with my contact info.

Regarding your situation of more SFR's or MFR's, my vote is for multi's just for the greater ability to scale and grow. You said you are at the point to be more aggressive, so going with multi's seems so much more efficient going forward. You have undoubtedly gotten good experience with SFR's the past few years, so branching into small multi's should not be any obstacle for you.

1 Reply

James WachobBusiness Member

Real Estate Broker · Memphis, TN · Member since 2015 · 1k+ posts · 888 votes

10y

@Pamela Starnes I have some MFR opportunities in Memphis!

2 Reply

Alexander Price

Investor · Gilroy, CA · Member since 2016 · 255 posts · 195 votes

10y

I am curious how well MFRs pan out versus SFRs since there seems to be decent SFRs at good rental prices in Memphis. Are there any middle class neighborhoods with quality MFRs. Having done no research, I heard the multis are my ore typically located in less desirable neighborhoods. Would love to hear more about this.

1 Reply

James WachobBusiness Member

Real Estate Broker · Memphis, TN · Member since 2015 · 1k+ posts · 888 votes

10y

@Alexander Price the only affordable MFR I run across are older and not in middle class neighborhoods. I do have my eye on a great complex in a middle class community called Bartlett, TN - but its $5m

I'm currently selling a 6 unit apartment complex in a working class community for only $155k

1 Reply

Alexander Price

Investor · Gilroy, CA · Member since 2016 · 255 posts · 195 votes

10y

@JamesWachob That's a little more than I am willing to commit to for now. After I learn a little more I'll be back for properties like that.

1 Reply

Cory Jones

OP

Investor · Ogden, UT · Member since 2016 · 12 posts · 9 votes

10y

So my brother owns a 4 unit complex in a pretty rough area and it was a major rehab but he picked it up for around $30K. Not sure how much he's put into it but he has finished 2 of the 4 units and both have rented fairly well for him from what he's said. I think he has only had one eviction in the last year and a half which seems good given the area. My word of caution though to anyone who is investing from out of state, I would not invest in SFR or MFRs in Memphis unless 1. you really know the area and are patient with tenants who often pay late, 2. you have someone that you completely trust living in Memphis to manage it and who has the ability to check on it if there are problems and go to court for you if needed, and 3. you know an electrician, plumber, and a handyman who are all willing to do side jobs (aside from their normal company work) at cheap rates. Not that I'm an expert but I would say if you satisfy those 3 criteria then you should be successful.

To answer other questions, I personally like the Frayser area for investing but have also had success in Hickory Hill (my brother calls it Hickory Hood - lots of gangs). However, I know other investors who buy all over Memphis in other areas and seem to do well. Just don't waste your time on 2 bedrooms or anything with 1 bath; you never get long-term tenants from what I've found. 3 beds are ideal for most families because the homes are typically between 1,000 to 1,400 sqft. Also, with these homes you can get away with window air units. Anything larger than that usually requires central air (which r410 units are expensive) and they must be caged or they will likely be stolen if the house goes vacant.

For people who buy MFRs, I am looking to scale and that is definitely more difficult with SFRs. How do you go about financing these properties? I know 4 units or less is non-commercial and require's 20% down (unless you know of more creative financing methods). How difficult is it to qualify for commercial loans and what is the down payment? If you have a MFR, would you mind sharing a breakout of your net operating income? I'm curious what the the income/expenses look like on these types of properties.

1 Reply

David Thompson

Investor · Austin, TX · Member since 2013 · 933 posts · 1k+ votes

10y

My path is similar. But once you get to about 6-7 SFRs, you also start thinking that its a slow walk rather than a run to bigger cash flow. Next steps could be smaller MF (duplexs / fourplexes) to get more cash flow. I would also throw in syndication. If accredited you could start looking at putting $50K into apartment deals that are run by experts w/solid track records to give you some geographic diversification, scale. Most apt investors in our area buy for 3-5 year hold periods, re-position (renovate / new property mgt) and increase income / force appreciation, then sell. You get quarterly cash flow and then a nice profit at sale.

This is a big reason more sophisticated investors migrate to commercial property due to these unique factors. So, you can have both worlds. Be a DIY investor and have a great experience w/your SFRs and gradually move into MF / larger deals. I just got a few new investors in a 320 unit apt community in north Dallas that will do just that. On there own, they may have never had the courage, knowledge, funds, etc to do this on there own. Syndication opens up this new world for many. You can also learn a lot from being so called "passive" by being intentional about it. See link.

https://www.biggerpockets.com/forums/432/topics/30...

2 Reply

Derrick Craig

Memphis, TN · Member since 2013 · 969 posts · 524 votes

10y

@Cory Jones

I like all the advice you have given for any one investing in Memphis... I have some MFR let me know if you would like to see some of the break downs.. PM me.

2 Reply

Alex CraigBusiness Member

Real Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes

10y

If you can buy in your backyard, I would certainly do that. I personally like MFR's, but only in "A" class areas. I own a triplex 2 blocks from U of Memphis and one near Overton Park in Memphis. #'s do not look great, but as soon as they go vacant, I am filing them. Those are keepers, not sellers. The key is advertising about 2 weeks before the tenants move out and with MFR's in "A" class areas, I tend to get several applications and I can cherry pick. In lower income areas, you may get several applications and cherry pick those too, but the difference is cherry picking the best of the best vs. the best of the worst. All that said, those tenants need a place to live too and with the right manger and unit, you can make money. I compare it to playing blackjack. YOu will go on a run, make some money, then all of a sudden the dealer will change (in this case the tenant) and you may go on a cold run. If you stick with it, know your luck will change. The key is, when do you walk away? Typically those tenants have credit scores not quite good enough to get in a house but better then an apartment complex that is filled with rival gang members. I am speaking from Memphis MFR's only. Other markets may be different.

901-848-9028

2 Reply

Robert C.

Investor · San Francisco, CA · Member since 2016 · 338 posts · 444 votes

10y

@Cory Jones Speaking generally, SFR's will tend to appreciate more over time, and MFR's will get you better cash-flow. Now, that actually hasn't been as true in my area (Bay Area, CA) since the crash, because multifamily has sort of exploded as much as single family, but historically it holds true.

I think you hit on something important in your last post, when you warned people not to invest in Memphis unless they know the area well. In real estate, local knowledge plus expertise in specific property types is your competitive advantage. So, anytime you consider a jump, you have to take into consideration the learning curve. Mistakes will translate into real $$$, until you gain expertise with MFR and Utah property.

My recommendation is if you're curious and you have the capital, you should give it a try and see if you like it. It sounds like you already have experience with tenants and rehab, so in many ways the maintenance will be similar but at scale. Multi-family should also be more stable over time, since you have multiple tenants and losing one won't necessarily make you negative cash-flow.

I don't think my numbers will make all that much sense to you, since Bay Area MFR tends to run at lower cap rates (lucky to find anything at 5%+ these days). But the place to start is to compare cap rates in your local market. See what a typical cap rate looks like when the property sells, and your goal will be to beat it. You can also look up some posts on BP regarding the 50% rule, although I can't say that it applies to my properties either because of the market. However, it will get you thinking about the different costs involved with multi-family.

The other thing I might mention with multi-family, is that you may want to target slightly better areas. Having one headache tenant in a single family home is one thing; Having a bunch of headache tenants in a larger multi-family will quickly get old if you self-manage. That's just my perspective. Whatever you might lose in terms of cash-flow will be worth it over the longterm.

2 Reply

Ronald PerichPro Member

Investor · Granite City, IL · Member since 2014 · 658 posts · 301 votes

10y

As my tagline implies, I prefer multifamily over SFH. I personally think it is easier to get a PM on multifamily properties because they like the concept of scale, too. You'll have higher turnover and more operating expenses with a multifamily over the SFH. On the other hand, you'll have lower per-unit acquisition costs and lower CapEx costs over the lifecycle. (In general, this is the case).

0 Reply

Michael Lee

Investor · Coppell, TX · Member since 2008 · 2k+ posts · 646 votes

10y

Hello and welcome to BP! It sounds like you are off to a good start but I would need a great deal to sell my house for equity from it. It all depends on your goals and intentions. You might effect other family members so you need to be careful and creative on what you do. You still should have many years left and should act accordingly. It is good to have a partner like your brother who is familiar with your placement of funds. If the deal is good enough to do you can have many different options available to you. Just take your time and be smarter at what you do. You can even use hard money lenders to use in your new ventures if you can budget their cost. Good luck to you!

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Michael Lee

Investor · Coppell, TX · Member since 2008 · 2k+ posts · 646 votes

10y

Hello again! I almost forgot to recommend small apartment complexes with a property manage company that is good. You can make decent money that way and let them take care of the maintenance calls. Good luck!

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Cory Jones

OP

Investor · Ogden, UT · Member since 2016 · 12 posts · 9 votes

10y

Great pointers, thank you all. I like the advice to diversify in my area and also the advice to focus on higher-end areas for MFRs. My concern, as some of you have confirmed, is that with MFRs the vacancy rate and turnover will be higher. Like Alex Craig said, being in a desirable area with lots of tenant options is key to getting good tenants and filling the vacant units quickly. I will say, I have had pretty good luck the last two years on my homes (although I had one house that went through 3 tenants in one year due to non-payment issues - I think it was just a run of bad luck). My biggest concern in this area is vacancy. I would rather have my tenant living for free than leave it vacant for an extended period of time because of the risk of theft and vandalism.

I'm assuming the issues of vandalism and theft are less common in the higher class MFR areas than they are in Frayser.. is that correct? I guess that would be the tradeoff, taking a lower cap rate for a safer area and better tenants.

Also, on MFRs, what does your debt coverage ratio look like? I personally have lived off of the 3/1 rule where I make sure I have 3 houses to pay on one loan, I've found this to be a safe strategy to quickly pay down debts. But this is for houses, what is a good ratio with multiple units? Also, what is a good occupancy rate in Memphis? Are you always north of 90%?

Thanks again for all your advice.

Cory

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David Veeder

Investor · Dallas, TX · Member since 2014 · 112 posts · 83 votes

10y

Welcome to beat your pockets Cory,

I have both single-family, duplex, 8 unit on my own and am partial owner of a 41 unit and 38 in the graveyard Dallas Fort Worth area. I started in single-family rentals and in my first year I ended up purchasing the 8 unit as well. Three euros in our so I joined a syndication that purchased a 41 and a 38 unit complex.

Going forward I plan to do both.

I find the commercial multi family (5 units and above) to be very powerful. Where single family rentals are be on comparative market analysis (comps/CMA) the multifamily properties are evaluated as businesses. Single family you have to wait for the neighborhood to appreciate and value to build equity, Where as in multifamily if you can increase your income and or reduce your expenses you increase your net operating income (NOI) which increases the value of the property. So with multi family if you're a great operator you can force equity.

For example the 41 a unit that I am partial owner of we manage to raise the rents $100-$125 a month per unit, while improving the operations and slightly reducing expenses. We bought the unit complex for 2.4 Million in June 2014 and now (less than 2 years later) it is worth 4.2 Million. I believe we will be refinancing to pull our original investment out this summer. This is very powerful, if you can be a great operator in improve the numbers.

There are a few and draw backs in multi family as well. As soon as you get to three or four units the tenet mentality seems to change to an apartment type of tenant that he expects everything to be taken care of byYou as compared to the single-family renter that in my experience seems to have a bit more oven ownership mentality. This is just what hi have found with my 100 to 150K homes more middle market. I assume that there is a more drama in the 40-70K home rentals.

I use leverage or loans to purchase all of my properties. The cash flow goes down but the RATE of RETURN on cash invested goes UP, enabling you to purchase more properties. I would look into doing a cash out refi on some or all of your memphis properties to get cash to purchase more properties. I do know lenders who will do this, so PM me you would like there information. Of you would like to talk further.

1 Reply

Account Closed

Financial Services · Salt Lake City, UT · Member since 2015 · 53 posts · 16 votes

10y

do you know what area you're looking at for MFRs in Utah? Cap rates are gonna vary

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Robert C.

Investor · San Francisco, CA · Member since 2016 · 338 posts · 444 votes

10y

@Cory Jones I wouldn't be so concerned about vacancy rate as a reason to NOT do MFR. Local vacancy rate is something you account for and calculate into your pro forma so that you purchase at the right price. That way, it doesn't matter if those units you accounted for sit vacant. You can think of any increase in your occupancy above that estimated vacancy as bonus cash-flow that proves you're a better operator than the next guy. You can also control some of the vacancy issues through location choices, capital improvements, and marketing.

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Lane Kawaoka

Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes

10y

If anyone who has more than 5 properties wants to get on the phone and chat about this as opposed to surface "keyboard banging" please give me a call. I am looking to make the move to larger MFH. Email is in the signature.

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Lane Kawaoka

Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes

10y

@Cory Jones @Chris Erwin @Becca Summers @Pamela Starnes @Alexander Price @David Thompson @Robert C. @Michael Lee @David Veeder

Investor to Investor lets connect.

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Alex Franks

Rock Hill, SC · Member since 2015 · 1k+ posts · 597 votes

10y

Originally posted by @Cory Jones:

Hi Everyone,

This is my first post on Bigger Pockets and I'm looking forward to learning from all you real estate experts! My name is Cory and I'm and active (part-time) real estate investor. I live in Utah but focus entirely on single family properties in Memphis, TN. My brother lives in Memphis and got me started in real estate investing about 3 years ago. I'm at a point now that I'm starting to get pretty aggressive with my investing and wanted to see if I could get your advice on my investment plan.

I currently own 7 single family homes and they rent between $675 and $800 per/mo. Since I'm buying in Memphis (and focusing on rehab properties) I've been able to buy all of my units and renovate them for around $20K each. Though there has been a lot of challenges with tenants (given its a rougher area), the cash flow on the properties has been terrific. We've finally nailed down the specific neighborhoods and property qualities that attract long-term tenants. Given my success in this area, I'm considering taking $80K in equity out of my primary residence to buy more homes there.

My concern though is that I'm starting to put all of my eggs in one basket. I'm only 30, but I drained my 401k to buy all of my other properties in cash. So these properties make up my net worth. Due to this, I have been thinking about diversifying a bit (outside of Memphis) and buying a small apartment complex or fourplex in Utah. I know it all depends on the area, but (in general) would you all recommend jumping into commercial units or continuing on with SFHs? Thank you all in advance for any insight/advice you could provide!

Thanks,

Cory

Just my two cents but having enough Cash reserves for your properties. House rich is great but cash poor is not always the best option.

Alex

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Michael Lee

Investor · Coppell, TX · Member since 2008 · 2k+ posts · 646 votes

10y

Hello again! Thank you for acknowledging me. I hope you will contact me someday for help! Best wishes!

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Michael Lee

Investor · Coppell, TX · Member since 2008 · 2k+ posts · 646 votes

10y

Something that I did not think of before. It is probably good to be in Memhis but it shoul also be good in Utah. Just try to stay within an hour's drive from your home or office. Most good MF will stay north of 90 percent. Be sure that the economy where you are thinking of is diverse and the population is growing. If those two things exist, then you will probably be OK. Good luck!

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Chris Cambridge

Investor · New York, NY · Member since 2008 · 187 posts · 36 votes

10y

Hold on to your knickers Cory the following statement might be a revelation!

Philosophy: One roof, one tax bill, multiple income streams/property vs multiple roofs, multiple tax bills, one income stream/property

So as to not sell the pie in the sky. Get more cash or reliable partners.

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Need Advice: Buy more SF Homes or Jump Into Multi-Family

Need Advice: Buy more SF Homes or Jump Into Multi-Family

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