All Forum Posts by: Marcus Auerbach

There is a BIG difference between duplexes and fourplexes. The argument of "more units under one roof" is really shallow. Both will generally cashflow better than single-family homes, but that comes with additional management efforts, so you are working for the cash flow. 

In my market (Milwaukee) I would choose a typical duplex over a Fourplex every time. Duplexes are ubiquitous here, also in good, desirable neighborhoods and tend to generate higher rents per unit. Fourplexes are typically built in clusters and are generally more often in the category "affordable housing". Duplexes typically have larger units and more bedrooms compared to quads. This is important because rent/unit is a function of both square footage and bedroom count.

Financial considerations:

The ratio of rent to the cost of ownership per unit is significantly better with duplxes. In a fourplex you share 1 roof (albeit it's larger), but still have 1 kitchen, 1 bathroom, 1 water heater etc to maintain - and they all cost the same to repair or replace, regardless if your rent is $800 or $1600 per unit. Bedroom and living space sqft is cheap to maintain, but that is what brings in more rent. The only cost synergy you have is maybe the roof, but that's once every 30 years and it's is also larger on a fourplex, so the argument is weak at best.

Tenant management:

The other issues are social dynamics. Single-family homes are the most stable, because they are self-contained. In a duplex, you have 2 tenants that share common space, so there is 1 social interaction between them. In a fourplex, every tenant has 3 other tenants to get along with, so that's 6 social interactions - and a lot more opportunity for drama. This gets amplified if you are renting to a lower-income demographic.

Personally, we invest in single-family homes, because when I started 17 years ago and had a corporate job with a lot of international travel they were the easiest to manage for me. A similar considertion applies for OOS investors, SF's are the closest thing to passive you ca get. Cash flow tends to be lower, but equity works a little better. 

We have 66,000 duplexes in Milwaukee, more than any other city in the US (yes, including Chicago), yet there are typically very few on the market. They make excellent house hacks to get started and most people don't sell them when they move, because they already know how to rent out one unit, so might as well just rent the second.

This is why they are not easy to buy; in most cases, the owner has lost interest years ago before they hit the market and there is quite a bit of deferred maintenance, outdated leases, rent below market etc to fix for the new owner.

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# Milwaukee, Wisconsin, Madison, Green Bay, Fox Valley, Appleton, Chicago, Illinois

This is only going to get worse, get an eviction attorney and follow through no matter what. This relationship is broken beyond repair.

On the bright side: you have to deal with a situation like this sooner or later, it's part of the biz. The good news is that you get to do this early and it will make you a better landlord. We have all had a few tough ones, they teach you a lot!

@Rene Hosman I understand that $50 are well well-intended, but what we try to contribute here is not for a few bucks. You are getting this reaction because it feels a little like the old "hey I'll buy you Starbucks or a steak dinner if you let me pick your brain for an hour and tell me everything you have learned over half a life-time of investing.."

I agree. Cash flow is overrated, not to call it misguided, especially for someone who is a high-income earner. Here is the question: what will make a bigger difference in your life? $200 in cash flow or ongoing headaches with repairs and nightmare tenants?

If you run any example property through the BP rental calculator, you'll see that cash flow is actually one of the smaller components, second to equity. So might as well optimize your investment for that. This usually means desirable property in a good neighborhood and high rental revenue. Depending on down payment, you'll be break even or maybe -$200 for a couple years, but that is well offset with your equity gains.

If you want cash flow, making money online is so much easier than REI

Generally, what you pay is what you get. A cheap PM has to cut corners in order to turn a profit. The right questions revolve around people and process: 

What's the staff-to-unit ratio? 
How robust are their processes? Screening and maintenance are the two big ones.

Beware of PM's who lure you in with a low % rate and (have to) make it up with fees and markups on the backend. A good PM can not operate profitable below 8% (or by charging you excess fees to make up for it).

Lower mortgage rates also bring more listings; too many would-be sellers are not moving because they are handcuffed to a 2.75% mortgage and would have to buy at 7%. Surveys show that going back into the 5s would mobilize many of them. And keep in mind that this is not adding more available inventory, because they are also buyers, so net zero.

I assume that most people on BP know that the Fed does not control mortgage rates. When the Fed cuts rates, often mortgage rates go up in response. Mortgage rates are driven by capital markets and typically follow the 10-year US treasury bonds with a 2.5%-ish risk premium. 10Y Tbill is at 4.2% so mortgage rates are close to 7%

Dan is right, OOS is hard and you will face an additional cost burden local investors don't have. I would say at least 20% or more. And you have operational inefficiencies, because everything you do remote is harder. Local is best. If you go remote, pick a market you can narrow the gap, maybe know a little because you have lived there once, or at least is easy to visit for you. Also, reduce the number of tasks you have to complete remote, because every interaction is prone to issues. Instead of a fixer-upper, buy a property that needs little work. And don't buy in a challenging area, but in a desirable suburb. You'll get better tenants (again, fewer issues) and higher rents.

OOS investing is hard. In theory, it should work, but that's theory. Realistically, you never get the same results as a local investor, because you have management inefficiencies and an additional OOS expenses burden. I would ballpark this at 20% or more. Things that are easy when you are local get hard when you are remote and have to rely on other people to check or do.

For context, I've been investing for over 15 years and after I quit my job, I got licensed and have worked with a lot of OOS investors, so I have seen both sides. Here is my advice:

1.) the people you work with matter more than the market you choose. A great team in a mediocre market will still deliver much better results than a poor team in THE best market.

2.) Narrow the OOS gap. Pick a city you used to live in and know a little, or one you often visit for work or family, or at least is easy to get to so you can visit often and learn the market. Knowing more or being there more often will narrow the gap between you and a local investor.

3.) Every interaction, every repair, every step is subject to issues and will increase your OOS cost burden. You can't control the issues, but you can dramatically reduce the number of interactions. Instead of a fixer-upper, pick a quality property that is in or near move-in-ready condition. Pick a desirable neighborhood that produces quality tenants.

Just to drive the point home, here is what I am personally doing: over the last 7 or 8  years we have gone from investing in basically half of Milwaukee (1.6 million metro area) to only investing in a 20 min zone around where we live. There are still a few more properties in the city we are going to sell and exchange for homes in the suburbs (better tenants, higher rents). There are a lot of synergies for our contractors and maintenance team to have everything is more concentrated. We also deal with fewer municipalities and stupid little things like water bills etc 

That makes perfect sense and totally follows econ 101. RE is not that complicated; you just need to look at the right metrics. Assuming there is not much elasticity in supply, will emigration continue?