Weighing the returns of SFH and MF

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Weighing the returns of SFH and MF

Wade G.
Houston, TX · Member since 2010 · 150 posts · 159 votes

So if I invested 100k into a MF value play syndication deal it seems I would earn 8-10% passive income (that seems to be the average). If I took the same 100k and purchased four SFH I would (or should) earn about the same net cash flow or maybe even more.

In 2-5 years the MF would be sold or refinanced and I would then get 80- 100% of my 100k back plus a reduced cashflow if the property was kept. With the SFH I may have to wait a little longer, maybe 10 years or so in a normal inflationary market, to refinance the homes and pull out the 100K and take on reduced cashflow.

The above scenario is asuming a normal market, no big dips, no big highs. It seems MF is a faster way to build wealth with less hands on but more risk due to more people being involved (yes I typically don't trust people). With SFH I see less risk because its all on me and I care about my money more than anyone else will.

So, if I am thinking this through right it seems MF is a way to build bigger and faster. SFH seems to have a limited growth unless one is willing to bring a PM and it seems it would take longer. Along the way though one could sell a SFH every now and then to a retail buyer at retail price whereas a MF deal is sold to another investor at likley not full market value.

Perhaps another way to look at it is if one wants to earn 2k - 4k or so per month then maybe SFH is the way to go but if one wants to build to 5k, or 10k or above per month then maybe MF is the way to go.

I only own SFH and have not been involved in MF so I may be off on my thinking. I would like to discuss the scenarios because this is where I stand now...buy a few more SFH or put the money into a syndication.

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Tamiel Kenney
Investor · Dallas, TX · Member since 2016 · 168 posts · 195 votes
8y

@Wade G. 

One of the biggest differences is the way MF is valued vs. SF. With SF, your value is pretty much capped based on comps. With MF, you can increase the value by increasing the NOI (increase revenue and/or decrease expenses). Even in a conservative market where you use a 10% cap rate…that means every dollar you increase the NOI is actually $10. You can't do the same thing with SF. Also, MF is typically non-recourse financing whereas SF is typically recourse. I have owned both and would pick MF over SF. I had a lot more headaches with my small properties than I do with our 1900 MF units.

Thanks,

Tamiel Kenney

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  • Michael Le
    Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
    8y

    My experience is SFH has higher returns, assuming you buy it right. If you're buying houses at 70% ARV with built-in equity then your returns should be higher. But it's just a much more hands on business and not as scalable. There are definitely others pros to SFH, such as higher liquidity, but in the end I do like MFH more too.

    1Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    8y

    @Wade G., your two scenarios are at the EXTREME ends of investing strategies.

    ie. One Investor for Single Family homes, vs one Investor for multi-multis (no-control Syndication).

    Whereas there's no reason you couldn't retain full control of your $100k - into SMALLER multi deal/s!

    1Reply
  • Ivan BarrattBusiness Member
    Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
    8y

    @Wade G. SFH can produce higher returns however there's more risk, less favorable financing and no scale. MF has less risk if done properly, advantageous financing and massive scalability. mic drop... ;)

    2Reply
  • Tamiel Kenney
    Investor · Dallas, TX · Member since 2016 · 168 posts · 195 votes
    8y

    @Wade G. 

    One of the biggest differences is the way MF is valued vs. SF. With SF, your value is pretty much capped based on comps. With MF, you can increase the value by increasing the NOI (increase revenue and/or decrease expenses). Even in a conservative market where you use a 10% cap rate…that means every dollar you increase the NOI is actually $10. You can't do the same thing with SF. Also, MF is typically non-recourse financing whereas SF is typically recourse. I have owned both and would pick MF over SF. I had a lot more headaches with my small properties than I do with our 1900 MF units.

    Thanks,

    Tamiel Kenney

    3Reply
  • David Thompson
    Investor · Austin, TX · Member since 2013 · 933 posts · 1k+ votes
    8y

    @Tamiel Kenney nails it.  Valuation methodology is completely different for MF (5 units or greater) vs SF and scale is a close complement as @Ivan Barratt notes. You want control, syndicate your own MF apartment and if value add (you will be able to a large degree have the ball in your court on increasing the NOI and increasing the value based on the increased income) if you chosen wisely. With SF, not so, based on comparable sales and if flat in your area, where is that value going to come from ? It's conceivable in a flat market to make solid valuation increases on income properties by your own ingenuity. Couple blogs on ideas to increase revenue and decrease expenses on an apartment to create that increased value.

    https://www.biggerpockets.com/blogs/9145/54408-28-...

    https://www.biggerpockets.com/blogs/9145/54632-28-...

    2Reply
  • Michael Bishop
    United States · Member since 2015 · 401 posts · 394 votes
    8y

    While I definitely agree with your "I care more about my money that anybody else will" comment, I think there's something to be said there. An appealing syndicate deal will have terms built in to protect your money and give the general partner more motivation to perform. One obvious example is the presence of a preferred return, which promised investors a return before the sponsor takes their cut. Standard to see around 8% here. A less appealing deal might have a lower or no pref, meaning the sponsor will get paid right off the bat, giving them less of a reason to perform. Another example might be an IRR hurdle. I.e. an 80/20 or 70/30 split until investors reach an 18% IRR, 50/50 split thereafter. This should be welcome sight to an investor because it is a marker of performance of the property, ultimately affecting how much money the sponsor will make (and we're all in this to make money). In a nutshell, look for a waterfall structure (or a payout structure with hurdles built in). In it's absence, a sponsor will be paid no matter the performance of the asset = not a very comforting sign.

    Another note to mention is that, although yes more people are involved, that's the beauty of a real estate syndicate - pooling multiple resources together to accomplish a goal that one would not be able to accomplish alone. Each team members expertise in their filed likely trumps that of a person who does everything on their own. For that reason, I'd argue that MF syndiates could be considered less risky (if the right deal is found, that is).

    2Reply
  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    8y
    Wade Guy everyday goes by I regret buying SFHs. You work with the worst tenants (entitled compared with Mfh) and competing with the masses. Today I just got a bill for 27000 for a tenant turnover on one of my Atlanta properties. Good geez.
    0Reply
  • Wade G.
    OP
    Houston, TX · Member since 2010 · 150 posts · 159 votes
    8y

    So far I have not regretted buying SFHs.  I would not be in the position to enter a syndication had I not bought the SFHs.  I never bought properties in low income areas.  All mine have been solid homes in middle class working neighborhoods where I have had quality families as tenants.  Just had one move out after eight years.  Four to five years has been the average for tenant retention.  Seems like the syndication route may be a good next move.  Really want to speed things up, life is getting too short to keep messing around.

    0Reply
  • Dan MahoneyPro Member
    Financial Advisor · Atlanta, GA · Member since 2016 · 256 posts · 350 votes
    8y

    @Lane Kawaoka You have recorded 60+ podcasts about the simple passive cash flow that comes from buying out of state turnkey single family rentals.  Have you changed your mind?  

    I think you are the first person I've heard argue that single family home tenants are worse than apartment tenants.

    0Reply
  • Dan MahoneyPro Member
    Financial Advisor · Atlanta, GA · Member since 2016 · 256 posts · 350 votes
    8y

    @Wade G. I think your question is more about skill and will than it is about asset class.  

    With a syndication deal, you have to believe one or both of the following:

    1) The skill of the sponsor will result in a better risk-adjusted return (after deducting the sponsor's cut) than you could earn on your own investments.

    2) You have better uses of your time than managing your investments, so you should outsource (and pay for) this work.

    0Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
    8y
    Originally posted by @Wade G.:

    So if I invested 100k into a MF value play syndication deal it seems I would earn 8-10% passive income (that seems to be the average). If I took the same 100k and purchased four SFH I would (or should) earn about the same net cash flow or maybe even more.

    In 2-5 years the MF would be sold or refinanced and I would then get 80- 100% of my 100k back plus a reduced cashflow if the property was kept. With the SFH I may have to wait a little longer, maybe 10 years or so in a normal inflationary market, to refinance the homes and pull out the 100K and take on reduced cashflow.

    The above scenario is asuming a normal market, no big dips, no big highs. It seems MF is a faster way to build wealth with less hands on but more risk due to more people being involved (yes I typically don't trust people). With SFH I see less risk because its all on me and I care about my money more than anyone else will.

    So, if I am thinking this through right it seems MF is a way to build bigger and faster. SFH seems to have a limited growth unless one is willing to bring a PM and it seems it would take longer. Along the way though one could sell a SFH every now and then to a retail buyer at retail price whereas a MF deal is sold to another investor at likley not full market value.

    Perhaps another way to look at it is if one wants to earn 2k - 4k or so per month then maybe SFH is the way to go but if one wants to build to 5k, or 10k or above per month then maybe MF is the way to go.

    I only own SFH and have not been involved in MF so I may be off on my thinking. I would like to discuss the scenarios because this is where I stand now...buy a few more SFH or put the money into a syndication.

    I recommend using your 10 residential mortgages to buy either SFR or 2-4 unit properties as the traditional 30 year residential mortgage is the greatest financing gig in town. Let's not forget that Cash Flow is not everything. Honestly I think that those who only focus on Cash Flow are missing the real reason one should be investing in Real Estate. That is the use of OPM (Other Peoples Money). Using OPM you get to buy a property using someone else's money (bank) then you get to pay off your loan using someone else's money (tenant) BEST GIG IN TOWN!

    Now once you have exhausted the best financing available (banks limit you to 10 of these 30 year loans) I would then be looking to move my money into commercial projects. Not necessarily syndication's but more so smaller deals you or a few partners can take down and use commercial financing for.

    1Reply
  • Scott KronePro Member
    Investor · Northbrook, IL · Member since 2017 · 352 posts · 295 votes
    8y

    If the commercial deal is set up properly, the commercial deal can offer a greater return due to the appreciation factor.  SF will not appreciate as much as commercial.  For instance, when we develop our self storage facilities, our cost basis is 65% of the value of the asset.  As the case flow increases, this spread only increases.  So we can generate more passive income as we as a greater amount of appreciation than we would by buying a SF.  We have prepared a webinar boot camp that compares the two asset classes.

    0Reply
  • Michael Bishop
    United States · Member since 2015 · 401 posts · 394 votes
    8y

    Can't forget about forced appreciation. Small (in relative terms) changes to the property will/can have a much larger impact on FMV with larger multi-families as opposed to SFH.

    0Reply
  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    8y

    @Dan Mahoney my opinion has slowly changes over the past two years lol.

    SFH rents have much more entitlement plus there is much more stuff they can screw up if they get pissed off.

    After over a few hundred investor consultants over the past couple years here is what I tell W2 employees. For those who are able to save more than $30k a year or have substantial liquidity (over 200k), being a landlord and especially flipping is a lot of work. If you like it cool... but just remember why we got into this... To be free from a JOB. Directly investing in a turnkey rental or small MFH is a good way to start to learn and build up the war chest to go into my scaleable investments such as private placement syndications. Whatever you do, try to be as close to the investment as possible. This is the fundamental problem I have with Wall Street who takes too much fees off the hard working efforts of the middle class.

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