SFH vs MFH cash flow argument

28 Replies

Good morning BiggerPockets! I would like to propose a debate in between Multi family and SFH. I am currently undecided on which property type i prefer for my first deal. My goal in real estate is to cash flow so that I can leave my job in due time. I would love feedback on the pros and cons of both and which one you prefer. Thank you!

I got into RE three Halloweens ago with the purchase of a duplex in an up and coming, hip part of Metro Detroit. Little did I know how scary the next three years would be. In all honesty they've been great. I purchased the place with an FHA loan since I didn't make any money back then, and was able to use part of the expected rental income in order to qualify. Since then, I've put $40k into the property, learned landlording the best I could, and now net a 25% CoC return, which is great.

I also borrow from the equity in the house thru a HELOC and am able to fund bigger and bigger things. So in my opinion, while there is a different learning curve with MFH, your entry costs can be lower per unit, and I net more. There has to be a reason the guys making the most money in RE have more than one unit under one roof right?

Originally posted by @Eric Gross :
Good morning BiggerPockets! I would like to propose a debate in between Multi family and SFH. I am currently undecided on which property type i prefer for my first deal. My goal in real estate is to cash flow so that I can leave my job in due time. I would love feedback on the pros and cons of both and which one you prefer. Thank you!

 Our goals are similar. Nothing wrong at looking at all opportunities and diversifying your portfolio! 

Search the forums for this and you’ll find a lot!

I personally prefer multifamily and that’s all I own.

Jordan Moorhead, Real Estate Agent in MN (#40542303)

There is no argument. Multi are safer in regards to risk of vacancy, lower maintenance per tenant, cash flow is higher and the market is not driven by the whims of home buyers.

SFH investing is primarily driven by speculating on appreciation. Without that long term holds on SFHs is generally in the neutral income range.

Some areas my vary and some extremely low priced markets will show positive results on SFHs. If you can buy for under 50K and rent for 1000/month assuming you keep maintenance and vacancies to a minimum some do well. There will be far more hands on management per tenant however.

Purpose built rental units are preferable for investors in my personal opinion. Those investing in SFHs will of course have alternate opinions.

IMO Multi is far better to reposition and really create the gains that are going to allow you to move away from a W2.

Where I am a SFH as well as a duplex's price are too high to create the kinds of returns that make it worthwhile. Young couples and flippers want those fixer uppers and drive the price up.

Multi’s still present those diamonds in the rough that can allow you to determine the return because it is based far more on real numbers.

My friends who rent out SFH here in N.J. and squeak by believing that they can cash out on sale or refinancing may be in very bad shape in the coming year.

Thank you all for the replies! It definitely supports my reasoning for favoring multi family. 

@Eric Gross ,

We have both, and 100%  no questions asked the multi-family homes are stronger cash flow.    Having said that, unless it's an ideal deal, we focus on buying little SFHs because they have been less stressful management wise. 

The intangible benefit of a SFH vs. MFH is if you self-manage, most people will prefer a SFH vs. MFH, so it will be easier to rent out from my experience. Also, with MFH, sometimes you feel like the baby sitter, when tenants have issues with the connecting side. SFH is better if there is ever a pest problem... 1 payment vs. 2 for a duplex.. if in a duplex, 1 side has pests, you have to treat both, so it's double the bills. SFH will be easier to manage and less stressful, so it's a toss up, just depends on what you value most and how you manage your business. Just my 2 cents!

@Linda D. I think duplexes present the problems you are talking about and I have come to view them as very different from a 4+ multi-family. I can rent out a 1 and 2 bedroom apartment all day- and they are overwhelmingly young couples, divorcée's and retirees. When I am done repositioning them they price out the problems.

I have one inherited 3 bedroom left in my 5 family- and when they move I am gutting that and making it into a spectacular 2 bedroom. I find that upon turnover the management aspect has decreased significantly.

Lots of ways to make profit in real estate and both are great strategies.  You will also find that different markets will have different rates of return for each and in certain markets, one strategy is better than the other.

I don't think in terms of SFR vs MF. I think in terms of generating the highest profit per property rather than per door. I'd rather have one 30 unit property generating $150/door than 15 SFRs generating $300/door.

Originally posted by @Eric Gross :

Thank you all for the replies! It definitely supports my reasoning for favoring multi family. 

If you have choice from the get go, of course - it's a no-brainer

By and large, the only real reason SFRs get bought by investors is when: they can't afford MFH!...

Originally posted by @Thomas S. :

There is no argument. Multi are safer in regards to risk of vacancy, lower maintenance per tenant, cash flow is higher and the market is not driven by the whims of home buyers.

SFH investing is primarily driven by speculating on appreciation. Without that long term holds on SFHs is generally in the neutral income range.

Some areas my vary and some extremely low priced markets will show positive results on SFHs. If you can buy for under 50K and rent for 1000/month assuming you keep maintenance and vacancies to a minimum some do well. There will be far more hands on management per tenant however.

Purpose built rental units are preferable for investors in my personal opinion. Those investing in SFHs will of course have alternate opinions.

 Do the math on your own post.

If you buy under $50k and rent for $1000 it takes just over 4 years of gross rent to recoup your capital.

So now I'm going to pre-empt the comeback about net rent and expenses. 

 I have via net rent, recouped the capital (including closing costs) on my first ever unit in  less than 4 years.

I would start out with Single Family to get some experience of managing properties before you get into the social dynamics of tenants living on top and next to  each other .

It's also harder to exit MFH if you decide it's not for you.

I think Multi family is better, for reasons discussed above. And yet, I keep buying SFR’s for now....

I’ve found the multi family space to be enormously competitive. I go to check out a multi family in crappy shape and there’s a line of investors (sometimes literally) to check out the property. Then I’m competing with multiple offers, and the numbers stop making sense real quick.

Compare this to the last few SFRs that I’ve bought. B class neighborhoods with nice ARV and good rent comps. The properties just didn’t show well because they needed cosmetic work. I pretty much was able to name my price because I was the only buyer.

So bottom line is I’ve made a pivot into SFR BRRRR’s. It’s the path of least resistance to a decent return. I figure this is a good way to add to my equity/net worth and build up the portfolio. Then in 5-7 years I could start 1031ing out of my SFR’s into multi family. Maybe the environment will change by then.

Think in terms of price vs net rents when looking at cash flow, not property type. While in many cases a MF will cash flow better than a SF, a MF will not cash flow better than a SF by simple virtue of being a MF. It all depends on the numbers within the certain market.

@Eric Gross The key is to leverage your money properly. So it isn't a question of MF or SFR. You should do both! Utilize the money that is out there so you can build a huge net worth!

You buy a property using someone else's money (the bank) then have somebody else pay off the bank (the tenant) What could be better than that? NOTHING!

For non owner occupied purchases of residential property (1-4 units) you are capped at 10 mortgages. 10 rental properties or 1 primary residence and 9 rental properties is a nice start to a great portfolio but nothing you could live off of.  To buy these homes you would need at least 25% down to purchase each property. 

Your from Ohio, never been to your town but let's run the numbers on a typical property in my hometown of Cleveland, Ohio as an example of the type of portfolio you could build using this strategy of SFR 1st then MF 2nd. I imagine the numbers in your town are very similar.

(FYI to everyone reading this thread...The numbers below are based on properties in reasonable neighborhoods. Sometimes investors get greedy and attempt to buy properties in questionable neighborhoods because the rent to purchase price ratio is better. That may work sometimes but more often than that it can lead to disaster, don't get all excited & be that guy as these numbers can be found in most Midwestern towns. So if you find better numbers then this elsewhere it's not a better market you are just looking at lower quality properties in a similar market.)

123 Main street in Cleveland, Ohio.

  • Price: $100,000.00
  • Down Payment: $25,000.00
  • Loan Amount: $75,000.00

Monthly Breakdown

  • Monthly Rent: $1,500.00
  • Monthly Mortgage Payment: $474.00 (Assuming 4% interest, 30 years)

$1,500.00 less your mortgage nets you a profit of $1,026.00 per month, but let’s not get too excited just yet. There are many more fixed and variable costs that we need to account for.

Monthly Operating Costs

  • Taxes: $168.00
  • Insurance: $65.00
  • Utilities: $150.00
  • Vacancy: $75.00
  • Repairs, Maintenance & Capital Expenditures: $150.00
  • Non-Payment of rent: $75.00

After accounting for all the proper expenses that leaves the investor with a net profit of $343.00 per month. If the investor chose to hire a professional property management company that would bring the net profit down to roughly $193.00 per month.

The self managing investor would net roughly $4,116.00 per year. Since the initial cash investment was only $25,000.00 that is a return on investment of 16.5% and the investment would pay for itself in a little over 6 years.

If the investor hired a professional property management company the investor would net about $2,316.00 per year which is a return on investment of 9.3%. It would take almost 11 years to recoup the $25,000.00

Now multiply those numbers by 10

We have a profit of $41,160 for the self managing investor & $23,160 for the passive investor. Not a bad start, but you aren't quitting your job with it. Sooooo

What does the investor do once they reach 10 residential mortgages?

Move onto multi-family investments.

After hitting your residential rental property mortgage limit it’s now time for the investor to move onto investing in multi-family properties. If you purchase a property that has 5 units or more it no longer falls under the residential financing restrictions. These properties use commercial financing and there is no cap to how much capital you can borrow so long as your credit and experience qualify and the loan amount hits the proper debt service coverage ratio.

This is what I did with my portfolio and it worked out very well for me. At this point in my life I rarely look into purchasing anything that has less than 4 units in it. If I do buy a residential property it is usually with cash or some type of owner financing & I am flipping it or holding for the long term with an owner financed note.

James Wise, Real Estate Agent in OH (#2015001161)
216-661-6633

@James Wise thank you! That was beyond helpful. I am just outside of the Cincinnati area, so my next step is narrowing down which neighborhood to target. You’re numbers definitely helped visually give me an idea of what I want. Thank you again!

Multifamily is much more convenient to manage. We are at the 6 plex 1-2 times per week -- even if it is just an eyes -on walk through, or quick common area maintenance. That allows us to keep an eye on our investment, and nip problems in the bud. For example, we Just delivered a Cure or Quit notice when we found a tenant was "dog sitting" -- not allowed. And we were able to easily follow up 3 days later to make sure doggy was gone. In a SFH, we most likely would have gone months before finding out about the unauthorized pet -- or would have hesitated in issuing the cure or quit due the possibility of a turnover/vacancy in December. With our apartments, turnovers are cheap and easy, and the apartments are easy to fill. We are able to easily afford to heat an empty unit in winter, which prevents a lot of problems.

Multifamily is harder to exit, however, because you will only sell to other investors.  

I have both. During holding and stabilization, multi’s have been better for sure.

At exit, I prefer homes. I easily sold 2 by owner recently retail to owner-occs. 

I haven’t sold any of my apts yet, but my buyers there will be investors only. I may even have to list with a realtor. 

Exit is easier with homes and buyers can get emotionally attached, unlike in the 5+ space.

If you have the money, the network or skill set, then going with large MF's is the best way to go. It's all in scale. MF is just a few more zero's. Buy a single family home for $150,000 and cash flow 200/month or purchase a $15,000,000 building and cash flow $20,000/month. That is the power of scale (of course having the right resources are important). There are many ways to get into MF's as well, so if there is something holding you back, figure out how to utilize your strengths. Investing in others deals, sponsoring deals or bird-dogging are all great ways to get started. 

I went from 10 single family condos cash flowing at about $50,000 a year to 5 apartment complexes now and $160,000 cash flow per year and have vastly forced appeciation on 3 of the apartment complexes so far!!  To think I bought my first little single family condo in May of 2011.  Just about 7 years later.

Wow!!

Swanny

Generally speaking multis are designed for investors and single families are designed to be lived in. It is a fairly recent concept ( 80s 90s?) that buy and hold investors would buy sfrs in mass as stand alone investments. Prior to that mostly the only investor would have been the developer selling a brand new sfr build. Obviously scalability is the built in issue with sfrs.

Today it is not an either or as much and some with even 1000s multi doors might also have some choice very well located sfrs sprinkled in. Emphasis on the word choice locations. 

For example a guy like Trump has one sfr across the street from the Beverly Hills Hotel. I know of others with less or maybe more ( Ex Clippers owner) who have a dozen sfrs scattered, and others in the 100s multi doors have a few too. Once in multis they tend to focus on multis almost exclusively if we are talking buy and holds. They still can pick up the occasional sfr deal along the way when if it is too good to pass up. Flips etc could be another story. 

Good luck!

Originally posted by @Bettina F. :

Multifamily is much more convenient to manage.  

....when things are going well.

I really won't add to the conversation much, but I can tell you that managing multifamily properties is more challenging than a similar portfolio of SFH. Why? Turnover, plain and simple.

A vacancy in a SFH will be easier to re-rent (in most situations) at the same price-point. Most people would prefer having "their own home" as opposed to sharing walls with others. The problem with SFH is you have to pay a lot more for the same income stream.

But going back to 2008, you'll see where SFH investors got spanked, especially in high-growth areas. Builders couldn't sell their new homes so they started renting them, and they severely pressured the rental prices. Older SFH couldn't compete with the brand new inventory at that price point and went for months with vacancies. There were a lot of SFH investors who lost most, if not all, of their inventory because they simply couldn't withstand the pressure.

I own a complex of eight two-bedroom apartments and one 1-bed with a gross rent schedule of +$70K/yr. Purchased for around $200K and rehabbed at about $100K (using the cash flow to pay for it). All in for $300K.

Around the same area, I can purchase/rehab a SFH for about $50K. That would mean I get 6 of these banks running for me. But the rents are almost the same between a SFH and an apartment. Maybe $50 more per month for a SFH. So I'd have a gross scheduled rent of $54K versus $70K.

I pay more for maintenance on the apartments because we supply trash, sewer, and water plus snow removal and lawn care. But that's around $3K a year. 

I pay less for capital expenses, though. A roof on one of the four-unit buildings is around $15K. To replace four roofs would be around $22K. Replacing the driveway is 1/2 the cost on the four-unit than replacing four different driveways.

If we have another downturn and the pressure is on, I know I can break-even on the apartments at a 50% vacancy. It will be tough, but I can survive it. Not the same with 3 of 6 SFH vacant. I wouldn't be able to cover the nut.

That's why we focus mainly on small multifamily. It feels more like a SFH but brings the benefits of multifamily with it.

To your investing success!

Ron

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