Correct Me If I'm Wrong - SF v. MF

12 Replies

I am currently a SF investor; however, been hearing for years about the advantages of MF/apartments. I think I may finally understand why - based on my experience. Kinesthetic learner, hands-on experience teaches me, sometimes the hard way. Please correct me if I am wrong as I am about to jump ship to MF.

1) My SF properties often are empty at the same time - summer - because everyone is moving after the school year. Expensive. MF/apartments have vacancies throughout the year - more manageable.

2) SF properties are more likely to have kiddos, teenagers in particular, that are hard on houses. MF/apartments are smaller and tend to have smaller gatherings and less kiddos, easier on property.

3) I have to pay a realtor a month's rent to place a new tenant in a SF. Expensive. I would not have to do that in a MF/apartments because I would have an on-site manager. However, is on-site management more expensive than paying a realtor one month's rent and vacancy loss for about two months, per year?

3) The make-ready on a 1600 sq.ft middle class SF is much more expensive than a 1000 sq.ft apartment. Obvious. However, the profit I am making on SF ($300-$550 a month) could be made on each door of a MF/apartment complex. More profitable.

4) I chose middle-class SF homes, great area, great tenants - right? Well, there have been a few exceptional tenants; however, the middle class tenants will leave a house in a big mess too, which is more expensive to repair - and more frustrating. Tenant quality in middle class SF homes has NOT been the significant difference that I expected. I hired  a property manager thinking they could do a better job finding tenants - nope. Might as well do MF/apartments and clean up the mess that is less expensive.

Ok - where am I wrong? What am I missing? Where am I right? Thanks!

@Terri David I think you are totally on the right track. The two big reasons that multifamily makes more sense than single family are scale and reduced expenses. With more units, you have a lot more income than you do with one door. For instance, I just purchased a 19 unit deal in Berwyn, which is an area I invest in quite a bit. Our gross revenue for the year once stabilized should be around $210,000 per year. Now if I jump to the 40-50 unit sized buildings, it is very achievable to get to gross revenues that are more than double that. That allows me to hire more people to help me and still make a lot of money. 

On the expense side, multifamily is just a lot more efficient if done right. For instance, the yard at my 19 unit costs me $20 per week to cut. I am sure a single family home would cost the same or more! 

@Terri David you're right with most of your assumptions. SFRs have a few advantages though.... more family friendly, tenants tend to stay longer (at least in my experience), and better exit strategy (easier to sell, generally). To your point about on-site management.... it's only cost effecting on very large apartment complexes (100s of units). Anything smaller and the apartment cant support it.

@Jason D. Thanks - I was wondering about on-site management. Good to know as I am not in the area of my properties, which is bittersweet. Exit strategy is better for SF unless maybe smaller MF properties. Most of my tenants have stayed about two years, but I want/need longer for the make-ready on middle class homes more profitable. Will see - I'm selling my SF properties and chalking this up as a good learning experience and do better next time! Thanks again for your response.

@Terri David you could possibly "hire" someone, for reduced rent, to look over the property and do showings, meet with contractors, etc... on a smaller building, but you'd still need someone to manage payments, marketing, tenant screening, etc.... it could save you some money on the management side, but you still need some type of management company, if you didnt want to do it yourself

@John Warren Yes - I've decided to sell my SF properties, use it as a great learning experience, educate myself in CRE more, then buy MF. I have learned a lot! The numbers on MF have been more appealing for along time, and now my experience confirms at least what I have heard about SFHs. I can't complain, at least I have not lost money, I just have higher expectations for my monies. Thanks for the encouraging response.

@Terri David no stress at all! I think SF can make sense for some folks.  LIke @Jason D. said, in some markets the tenants will stay longer and be higher quality. A lot of this comes down to location though. I have a tenant in my 4 unit in Lyons who have lived there for 19 years. In the areas where I work, it is not uncommon for some folks to rent for decades. A lot of this has to do with how expensive a house is in comparison to an apartment as well. 

@Jason D. Yeah, been thinking about hiring someone for free/reduced rent and look over the property. Maybe they could help with screenings, contractors, etc. but also that's  something I can do online/phone... and if tenants have bank accounts take care of rent that way too. I've never had a tenant that didn't have a bank account but know it's possible. What I know for sure! is that even if I have someone "managing" property, I still end up doing more work than expected. It truly is semi-passive income. It's really a choice of working with tenants or working with someone managing tenants - it's work either way. At this point, I would rather work business-to-business rather than landlord-to-tenant. 

@John Warren Interesting point that I have not thought about much is that in my area it can be more expensive to rent than buy a house and renting a house is about the same as renting an apartment. That may be one reason why I'm getting the questionable tenant population in a middle class neighborhood that treat the property like a cheap apartment. As I do research on the location of my MF purchase, I will keep this in mind! And, I have to admit, I'm a little envious of the 19-year long tenant - that's awesome!

@Terri David Add: I wish I could remember the author's name (if anyone's interested I'll look it up), but he described SFR's not as "real estate", but rather, "FEEL estate". The house is designed to FEEL like Home. They are not built and sold so investors can profit (altho often they can). They're built and sold as a place to raise a family. They're priced based on comparables. Multi-Family units are designed from the begining, from inception to construction to sales, as a means to generate passive income. They're priced based on ROI.

@Terri David You're on the right track with switching to MFH. @John Warren gave you a lot of good feedback. 

I want to point with the property manager living on a reduced rent, maybe test them first - hire them and watch their work ethics and performance for at least six months. You don't want to end up with "unwanted" tenant if they don't perform up to your expectations. 

Another point, the economy of scale always works best with MFH. So say you start with a small MFH and then keep adding more doors in the same geo area, then the same property management can manage more doors for you. It will allow you to negotiate better terms (essentially lower %) with them, so you will be able to reduce the property mgmt fee expense indirectly. 

Hope this helps!

@Alina Trigub Excellent point! I typically give a 90 day period then reevaluate in most of my commitments. I see no reason why I would not apply the same principle here, except here I like the six month 'probationary period.' Again, another example of economies of scale at work in MF properties. The property management company I use right now requires 20 units before they offer a discount for subsequent units/doors.

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