Single Family vs. Multifamily for beginners?

Question

Hello BP Friends,

I am just strating out and looking to buy my first SF property. While I am searching for SF properties in Houston area (which is not easy to find through MLS), I was wondering about MF investments. I would appreciate suggestions/advice from experienced investors. Here are my questions:

1) Is it advisable to start with MF for someone who hasn't done SF investment? I am thinking of small     MF property (5-20 units).

2) How should I go about it? Where do you look for MF properties? I have been searching on                 loopnet.com.

Thanks in advance for your help.

Account Closed · Answer

I got a deal drunk off my behind at my birthday party when a friend said his father was selling a house.  Closed 4 weeks later on an owner finance deal.  Drive for dollars is a good place to start.  At this point, I would suggest a really cheap house in a rental neighborhood.  Knock on every door.  Check out the tax website and mail the name and address of the person on the tax deed.  Talk to tons of people.  When you see someone with a rental call the number and see if they are interested in selling.  Listen to the podcast.  There are tons of ideas.

James Wise · Answer

They both have pros & cons

SFR Pros

• Low barrier to entry (cheap)
• Many to choose from
• 30 year mortgages!
• Largest buyer pool when it is time to divest
• Longer term tenants

SFR Cons

• 1 vacancy is all it takes to go from 100% occupied to 0% occupied
• homeowners drive the market price, not rental incomes
• Vacant houses are risky. IE theft, frozen pipes, damage etc...
• Higher turnover costs than apartments
• Residential mortgage amount is capped at 10 per person

Multi Family Pros

• A few vacancies are easily carried by the other occupied unit
• Building always has people inside of it which keeps it safer from theft, damage, vandalism etc...
• Built to produce income
• Financing amount is essentially unlimited
• Cheaper unit turnovers

Multi Family Cons

• Higher barrier to entry (expensive)
• Tenants live on top of each other (you now need to be the referee)
• Tenants are more transient
• Smaller buyer pool when you are ready to sell

Benjamin Lapidus · Answer

Jesal,

A couple of experienced folks in the Texas arena are @Joe Fairless and @David Thompson.  They both offered me loads of great advice when I first started buying 4 years ago.  Interestingly enough, they're both going to be at the Best Ever Real Estate Investing Conference next month in Denver, CO.

Happy dealing!Ben

Alexander Zurn · Answer

@Jesal Shah I'd recommend to keep simple on the first go round. As you will find many people say, it is ALL about what you want. Lets review the options you've presented.

1. Single Family - the best way many people get their hands dirty is through "house hacking". This is when you purchase a home (SF or MF) and rent out the other rooms (in a SF) and/or the other unit(s) (in a MF). You charge for the other room/unit rental and it helps to pay the mortgage. Along the way you pick up experience land lording and collecting money, while experiencing home ownership for the first time. Other options in a single family include: live in flip (takes time & $$), regular flip (takes experience & $$), or fixer upper (takes time, experience & $$).

2. Multi-Family - as mentioned above this gives you the opportunity to be a home owner, a landlord, and perhaps your own contractor. You can valuable experience that will no doubt be the building block for you as a real estate investor. It's important that you do your homework. For example, a "small MF Property" as you mention in your first post is actually 2-4 units. Anything bigger (5 units+) is considered a commercial property and goes by a whole different set of guidelines/rules/loan products, etc. IF that is your goal, a large MF property than by all means explore BP and certainly track deals on loop net. Multi-Family's are great for house hacking, buy and holds, flip, etc.

Let me know if you have any questions! You're in the right place, BP has been great to me and will continue to be great for anyone that joins.

Account Closed · Answer

Just find a property and start with what you find.  Don't limit your search to any particular type of property.  When a deal comes along, evaluate it and take the appropriate action on a deal by deal basis.  If you are looking only on MLS, your chances of being successful are extremely limited.

Bruce Petersen · Answer

Lots of great advice here but a couple of points:

MF is only 5 units and larger, never 2-4 units, this is still considered SF.

There is a lot that goes in to underwriting a deal.  You are now buying a business and not just a house that should come with full financials but unfortunately often doesn't in the smaller properties. Many times smaller properties (under 50 units believe or not) are mom-and-popped and have poor or no real financials to go by.  You really need to find someone to learn from in MF.  In the 5-12 or 24 range you should be able to at least get their utility bills and in some cases you can ask for bank statements to verify what they are telling you in regards to income.

To find true MF, I would contact brokers in your search area and get on their email list and they will start sending properties that fit you search criteria. For 5-20 units you can sometimes find them on MLS and believe it or not I actually have a friend that found one on craigslist.

I think the advice from Oren K. is good with you lack of time and experience.  Try to find a knowledgeable partner to work with or join a syndicated deal, just be careful when vetting your deal sponsor.

Lauren Lockett · Answer

@Jesal Shah

I'm new to this, but I'd go for the MF if the opportunity presents itself. I imagine the experience will be about the same and you'll just have more moving parts! GO TEXAS!

Oren K. · Answer

Jesal,

With the additional information regarding your personal preferences provided, some more focus can be provided;

"may demand a lot of time", "prefer to buy stable":  All investments take some time commitment. Even if it is just on the front end by getting advice and deciding what to invest in as you are doing here on BP. If that is the limit of your ability to spend time, a truly passive investment seem most appropriate.

There are a couple of passive options that come to mind that offer different levels of risk / reward;

1) Participating in a syndicate - Spend your time vetting syndications / syndicators that fall within your investment envelope (e.g. 50K, 250K). Once you invest, they take care of everything and you are basically along for the ride. If you do a good job of vetting, this is probably the lowest risk and lowest (but not necessarily LOW) return approach.

2) Partner with someone - You provide some / most / all the $ and they do all the work (which they get paid for). Similar to syndication but with fewer people. beyond the paperwork, a lot of trust is involved. Generally a bit higher risk and higher return.

3) Turnkey - You buy via a turnkey provider who does all the work but you have all the $ risk. Typically better returns but higher risk.

With all of these approaches, there is always the risk that things go off the rails and you have to spend a lot of time and effort to get them back on or to recover what you can. There are lots of threads on BP regarding how screen / vet / select a syndication / partner / Turnkey and issues to watch out for.

Good luck,

Oren

Charles Nguyen · Answer

I would suggest get educated first.   BP has lots of resources for that.   SF and MF are different animals, and both are great.  You may find you like one over the other as you grow in the business. Also,  go network with as many investors as you can.Good luck!

Single Family vs. Multifamily for beginners?

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