SFR in A area or Multifamily in B or C area?

Question

I'm basically wondering--in general--if there's a general preference in terms of real estate investing towards investing in an SFR in an A area or a multi-family (duplex or triplex) in a B or C area? Is there a rule of thumb?

I know there are a lot of conditions unique to every situation. The cost per door would be lower with a multi-family, but the SFR in a nice area might attract a longer-occupancy tenant. The multifamily in the B or C area would likely attract a more risky tenant than the SFR who might damage the unit more than an A tenant. Therefore, the overall turnover costs with the SFR might be lower, right?

Obviously, there are many other conditions, but I'd love to see if you have any general rules of thumb.

David Faulkner · Answer

The multis will have better cash flow day 1 IF you can effectively manage them ... that is a big IF, since they for sure will attract more transient and less financially stable tenants. However, the SFR in a nice neighborhood will likely appreciate more in the future, IF you are willing and able to hold it for the longterm ... again, that is a big IF since the initial cash flow will be less and it will be either 100% occupied or 100% vacant for one house. Also, the SFR may actually end up cash flowing more in the long term, since rent increases typically go right along side price appreciation. Just a matter of if you prefer short term cash flow today or long term appreciation tomorrow. Personally, I've done very well house hacking single families in class A neighborhoods, but then again I arranged things conservatively so that I always have the means and will to hold through the rough times as well as multiple exit strategies in place in case plan A didn't work out.

Daren H. · Answer

• A, B and C class is very subjective you will find after A. People generally agree on what an A class area is but it starts to differ at B, C and beyond. In my area, I consider C class working class but relatively safe places to go and to live. Just regular people trying to carve out an honest living. I love this class for SFRs personally. The tenant situations generally make them renters longer which cuts my vacancy. I love A and B for the increased ease of rentability and excellent tenant quality but my personal experience has been the tenants situations allow them the ability to buy a home sooner than later which creates higher vacancy. I have A/B properties that rent easily and attracts great tenants. I have had three sets of tenants that have stayed 2 years and bought their own home. I would love a multifamily in what I consider a B or C area. Duplexes in my area are going to be mostly in C, D and F areas.

Robert Santangelo · Answer

I vote for the one that makes you the most money with the level of management that you're willing to accept.  Since every investor has difference tolerance levels for management, it's impossible for me to know what is best...for you.  As a general rule of thumb...since you asked...find a C property in a B area, a B in an A, etc...those tend to be the best opportunities because the area will support the property improvements.  Lastly, always be thorough in your tenant screening process as that's where the rubber hits the road...there are good and bad tenants in all areas.

I hope that's somewhat of a reasonable answer to your question...  :)