SFH vs multifamily rentals- pros and cons

Landlord Forums & Rental Property Questions 36 Replies

I know this has been discussed before, but I'm just looking for some experience-based weigh ins on this.

SFH PRO

one tenanant, longer term. Will tend to take care of the property better.
lease option
appreciation

SFH Con

vacancy= no cash flow
cash flows typically not as good as Multifam

Mult PRO

better cash flow
can still cover mortgage with vacancies.
maintenance is all under one roof for 4 tenants.

Multi CONS

shorter term tenant(apt vs "home")
appreciation may not be as good
smaller target audience for selling (investor-only sales)

I'm debating this. My strategy is going to be long term B&H..(retirement) so not as concerned with appreciation play. Also I'm looking to build a portfolio up over the next few years, so I'm looking at the best ROI. from what I can see, multifam, even accounting for vacancy (excluding exit-aka selling) would be the best play.

Thoughts on this?

I think I'm answering my own question here.. Do I still get an influence point for answering my own question?;)

I think it depends on your personal investment strategy and what you want to accomplish but I've pondered the same question and I think overall, SFH is the way I'll go. There are a couple of things that you haven't mentioned that steered me toward SFH.

Taxes & Insurance are higher on MF which has an impact on your cash flow. You also have issues of tenants impacting on each other, for example, two tenants not getting along or one neglectful tenant damaging the property and affecting the others.

I heard a story the other week about a horder tenant in a duplex - it wasn't pretty. SFH requires less "management" too, calculating utilities, waste etc. if much more complicated with MF. You also mentioned vacancy being a pro on a MF, but it can also be a massive problem. If something bad happens to a property and you have to vacate the building, you lose a whole chunk of money.

MF has it's place, and I think if I was buying a Duplex to live in one side and rent the other I'd take it on, but ou have a lot more to consider and do with MF than you do with SFH.

?SFH requires less "management"

This is the single biggest factor for me to go with SFR. Being an out-of-state investor, I cannot imagine owning MF. I do not have that much faith in a property management company taking care of my property.

I don't think there is more management required for MF in all cases. You mention utility costs, but you can find MF with separate meters, or have sub-meters installed and billed directly to the tenants. I manage my rentals and, when there is not a maintenance request or other specific reason to visit a property, I just do some drive by inspections and an occasional interior inspection of the property, in that respect it would be more management intensive to have a couple SFHs in different locations than a single MF building.

I agree that single families are easier to manage and typically have higher cash flow vs. dollar invested but once you get 10 mortgages, portfolio financing can be a bit more expensive. If you know what you are doing, and become an expert in due diligence and research, buying larger multifamilies is a great way to significant increase cash flow with 1 loan. It is a different animal for sure but certianly has its benefits over singles as you can grow much quicker.

With that said, I highly recommend starting with singles and 1-4 units until you get really comfortable and start to define your business model.

I'm for SFR. My take on it is that you have 1 headache vs. 4. Cashflow might not be as high but if it's for long term you have a better exit options ( wider market)

Originally posted by Chris F.:
I know this has been discussed before, but I'm just looking for some experience-based weigh ins on this.

SFH PRO

one tenanant, longer term. Will tend to take care of the property better.
lease option
appreciation

SFH Con

vacancy= no cash flow
cash flows typically not as good as Multifam

Mult PRO

better cash flow
can still cover mortgage with vacancies.
maintenance is all under one roof for 4 tenants.

Multi CONS

shorter term tenant(apt vs "home")
appreciation may not be as good
smaller target audience for selling (investor-only sales)

I'm debating this. My strategy is going to be long term B&H..(retirement) so not as concerned with appreciation play. Also I'm looking to build a portfolio up over the next few years, so I'm looking at the best ROI. from what I can see, multifam, even accounting for vacancy (excluding exit-aka selling) would be the best play.

Thoughts on this?

So look at your last paragraph... you're long term B&H for retirement, not worried about appreciation. Given that you mentioned retirement, I'm going to expand upon that and assume you're looking to fund your retirement through passive cash flow, i.e. you don't need to sell.

When you take those two things into account, you remove a PRO from Single Families (appreciation) and a CONs from Multi Families (selling audience & appreciation).

You're basically left with the assumption that a tenant will take better care of and stay longer in a house versus the assumption of a bit more management intensive, with higher turnover, and the reality of higher cash flow in a multi family.

Seems like a no brainer to me.

I would like to see some data on 2 and 3 bedroom multi families versus single families in terms of how long people stay. Just seems intuitive to me that most of the families in my multi bedroom units aren't dreaming of owning a house, they will stay for years if I treat them right... where as most house renters some day will want to own that house. 1 bedroom apartments would be a different beast I'm guessing.

Originally posted by Brad Z.:
I agree that single families are easier to manage and typically have higher cash flow vs. dollar invested but once you get 10 mortgages, portfolio financing can be a bit more expensive. If you know what you are doing, and become an expert in due diligence and research, buying larger multifamilies is a great way to significant increase cash flow with 1 loan. It is a different animal for sure but certianly has its benefits over singles as you can grow much quicker.

With that said, I highly recommend starting with singles and 1-4 units until you get really comfortable and start to define your business model.

Where on earth are you investing that Single Families have a higher cash flow per dollar invested, i.e. CoC return? If that were the case, few if any would bother investing in multi families.

It has been a while since leaving the SFH arena (1994) but something that was in play at that time was cost per door. A single family home was running about $65K per door and rents were around $500-$550 per month. Apartment was for sale for $20K per door and rent was $400-$425 per month. We quickly sold our SFHs and got the 27 unit apartment and have never looked back at the SFHs again.

With SFHs you also needed to have all of your tools in your vehicle as they were usually scattered all over town. With an apartment there is a storage/work area for having tools and equipment available in one spot.

A book I once read stated that the more units you put under one roof, the lower the overall costs to maintain.

Higher cashflow per dollar invested in single families??? I find that very hard to believe!! Can you give som examples?

Sure multi families will require more maintenance/management but I think you guys are missing something here. More importantly than the property IMO. is the tenant you are putting in them, as well as location. I have some multi families in GREAT locations and I try to screen very well and gotta say for the most part I am very happy with my tenants in my multi families.

You can have a nightmare tenant in a single family that calls you for every little thing or cannot even change a lightbulb on their own just as easy as in a multi family.

For maximizing cashflow multis are the way to go IMO. Not to say single families don't have a place as they do. I just feel to build cash flow quickest multi family is the way to go.

I started out in a owner occupied 2 family where my tenant was paying 80% of my mortgage. This enabled me have quite a bit of extra cashflow to save toward dp of next investment.

These days I tend to look for 2 families that have the feel of a single family. IOW. first floor and basement yard and garage are for main tenant and then there is a small 1 bedroom apt. upstairs for a single guy or girl or maybe even a couple. I have found this works very well for what I want to acomplish.

regards,
Chris

Originally posted by Nathan Emmert:
Originally posted by Brad Z.:
I agree that single families are easier to manage and typically have higher cash flow vs. dollar invested but once you get 10 mortgages, portfolio financing can be a bit more expensive. If you know what you are doing, and become an expert in due diligence and research, buying larger multifamilies is a great way to significant increase cash flow with 1 loan. It is a different animal for sure but certianly has its benefits over singles as you can grow much quicker.

With that said, I highly recommend starting with singles and 1-4 units until you get really comfortable and start to define your business model.

Where on earth are you investing that Single Families have a higher cash flow per dollar invested, i.e. CoC return? If that were the case, few if any would bother investing in multi families.

Bismarck, ND does. I know its very atypical but just throwing it out there.

I think you really have to look at your market and see whats available to you. I don't think it has to be an either-or scenario.

Personally, Ive went away from Multi families for SFH simply because you attract a much better tenant and that is where the best deals are presenting themselves in my market.

If you ever want to liquidate a property to buy a retirement home, SFH are obviously much easier to sell - the flexibility might be something to consider. If you have a big apartment complex, you really don't have that option.

Thanks for the input all,

Seems like most are in agreement that Multifam is the preferred play for cashflow, allbeit with higher management requirements and turnover.

I would add that higher cashflow will give the funding to grow much faster intially, and I can always branch out into other areas (SFH, rehab,etc) If I decide I'd like to have some capital as well as cashflow.

Some would say do rehab to generate capital for rentals, but as that's a much riskier play and more cash intensive, B&H first would probably work better for me.

In my market, multi-family trade for between a 5-7% cap rate. The average single families I buy are 10-16%.

That is probably unique to a few markets.

For me, two major pros to multi-family that @Chris F. missed are:
- economies of scale
- lending climate is easier (after 10 especially) in multi-family

I don't think higher SFR yields are that unique. Every beaten down market is filled with huge volumes of SFR foreclosures/short sales that have decimated SFR prices, often times more so than 2-4 unit prices. I share Brad Z's market, and it's true in this area. You can be into a SFR at $30k all-in, renting for $850, in a solid area. (Thank subprime mortgages for this price collapse.).

The houses rent faster, always, around here. These folks losing their homes want to rent houses. I think the economies of scale on MFRs are overrated a bit, since you're paying for maintenance/utilities for the common areas/grounds on MFR's, and typically paying for water as well, which is $40-55/unit/mth around here. Then factor in higher turnover, higher turn costs/evictions, tenant disputes.

The undeniable advantage of MFRs is that for conventional lending, you can parlay your 10-loan capacity into 40 rental units (if all 4-plexes), and it's likewise more efficient on all the fixed closing costs. In fact, the $30K SFR I mentioned is almost impossible to finance due to the small loan size. So you have to wait for seasoning (6 mths) and use a hopefully much larger appraisal. Or you can blanket a few of these SFRs together, it you can find an accommodating portfolio lender.

I'm leaning toward buying these houses through private lenders at this stage. These houses should have high appreciation as distressed valuations converge with non-distressed, over time, one of the primary reasons the private equity funds are jumping in.

I buy Single family properties for several reasons.
In Dayton I can find a large inventory that if repaired will rent quickly.
I look for tenants who are excited about moving into a well renovated home and will care for the property.
I cluster my investments (have 4 on one block) this gives me an advantage in property management and an understanding of what needs to be done and cost on each rehab.
Stick to small 2 and 3 bedroom properties that are easily maintained.
Since homes are not attached I have less conflict to deal with between tenants.
Wish I could use leverage more effectively, but currently buying all cash in a Self directed IRA.

David, I hope you are right, I agree with your assessment

"I'm leaning toward buying these houses through private lenders at this stage. These houses should have high appreciation as distressed valuations converge with non-distressed, over time, one of the primary reasons the private equity funds are jumping in. " but I dont see any activity in Dayton from private equity. Lots of small individual activity form out of state investors from California.

What is your assessment of the Dayton Market ? I am currently invested in Dayton zip code 45403.

Michael -- I don't really know Dayton at all, haven't even driven up to look around. It's outside of my driving range for a target market. The zip code you mention is a pretty low-income demographic. I usually look for household income a little higher, but it's so hard to make generalizations. If you're having success with stable renters that's great.

I don't purchase single families because (in my area) you are usually competing with owner occupants who are influencing the price so that it is higher than what the rents would support. Unless the single family is near a busy street, an ugly abandoned commercial building or some other negative factor like that where there less owner occupant competition, but it would still rent easily to good renters.

Over the past 10 years, I've invested almost exclusively in SF. In the area that I've invested, the numbers have just worked out better. I currently have 55 SFHs in East TX that have performed extremely well (from both a cashflow and value standpoint) throughout the housing recession. One benefit of SFHs long-term is that the value can potentially scale up over the cashflow, whereas multi unit property values will most likely be tied to the cashflow.

Another recent development in the SFH world is the recognition by private equity funds of the SFH portfolio as an asset class. Since the beginning of this year, over $2.5B has been pledged by PE funds to acquire SFH portfolios. If you build a strong SFH portfolio now, an exit in a couple of years may be to sell to a fund that is aggregating SFH portfolios to form a SFH REIT.

Happy investing!
B

Guys

I apologize for piggybacking on this thread but not allowed to create new posts as a non-paying user. I'm a first time home-buyer and looking to buy an owner-occupied 2 family home in Bayside, Queens. Does anybody know this area and if 2 family homes are in demand?

All my calculations point to a decent cash flow but what I'm most afraid of is the appreciation levels of 2 families vs sfr over here. If I make a profit of 15k every year for 5 years but the property appreciates only at 20% over this time period vs 33% for SFR, I would be at the losing end of the stick when selling the house in spite of a net gain of 75k. Of course, if property levels stay where they are or fall, I would be in a good situation

Thanks

Also, this is a semi-detached property

Thanks

Originally posted by @Sam Dal :
Guys

I apologize for piggybacking on this thread but not allowed to create new posts as a non-paying user.

Sam Dal You can absolutely create new threads as a non-paying user (I'm one). There are only a few forums reserved for Pro members... you must have picked one of those. Try a different forum!

Little experience here in MF, so my opinion is limited. Common areas were a big headache. Tenants banded together and their gripe lists were long. Barking dogs, loud music, slamming doors- we got a phone call.

Benefits and drawbacks to both.