Why 3-15 Unit Buildings Offer the Best Returns for Investors

by | BiggerPockets.com

Investors need to work harder to find good deals than they did five years ago due to the more competitive real estate market. Our real estate company decided to use data and insights to figure out which investing class to target. Our company manages over 2,500 units across central Pennsylvania. (We own 200, and the rest we manage for other owners.) We are able to use that data to make better decisions.

From our analysis, we have found that the sweet spot to investing is the 3-15 unit building due to lower purchase demand. One caveat to the analysis: We invest based on IRR over a 20-year period. We aren’t flippers, and we aren’t trying to guess at highly appreciating markets. Each investment class has deals in it; we simply think that 3-15 unit buildings are the easiest deals to find.

Related: 4 Tips to Find Your Niche in Real Estate (& Actually START Investing!)

Single Family Homes

Let’s start with single family homes (SFHs). SFH buying demand comes from two major buckets. First, there is the obvious group of people who buy a SFH for their primary residence. The other major demand bucket is high net-worth individuals who buy these as investment properties. Doctors, lawyers, executives, etc. are looking for a place to invest some money. They typically aren’t experts in real estate. They are usually looking for a safe bet that won’t take too much of their scarce time. Also, they often want to acquire a property where they feel secure (both from crime and financial risk)—usually taking away low income housing as an option.  

We acquired our first couple of properties from this investment class. The returns have been OK (not great or horrible). They are also easier to manage and have less variance of evictions and maintenance costs. Typical cap rates in Pennsylvania range from 5-8% for class A and B SFH properties.

This is the first property we bought, a single family house in Lancaster, PA.

Multifamily Complexes

On the other end of the spectrum, 15+ unit buildings are attractive to syndications and funds. Managers of big pools of money want to put their money to work in one major transaction. It’s simply not time efficient for them to acquire smaller properties because they need to deploy major amount of money. Syndications have risen in popularity as seasoned investors raise money from individuals and deploy that money all at once to a multifamily complex. This growing demand coupled with a revived economy has pushed cap rates for these complexes much lower into the 5-7.5% cap rate range.  

This is the 49-unit complex bought as part of a syndication that we manage in Elizabethtown, PA.

3-15 Unit Buildings

We believe the sweet spot for investing right now is the 3-15 unit building space. The only demand for these properties are, for the most part, local real estate investors. These properties are too time-consuming for the major national investment syndications and funds to acquire. The high net worth individual is typically not interested in the complexity of multi-unit buildings. Outside of a few house hackers out there, it also doesn’t work for people looking for a primary residence.  

We actually structured a syndication with the sole intention of splitting the gap of demand to acquire $10M in 2-15 unit properties. The syndication investors invest into the syndication without knowing what specific properties will be acquired. But the upside is we are able to target 9-15% cap rate properties—significantly higher returns than a complex would offer. This strategy requires a strong property management partner because it’s much tougher to manage buildings spread out across a region.

To get even more specific, we believe the REAL sweet spot is 5-15 unit buildings because these buildings get commercial appraisals. If you use the BRRRR method (buy, rehab, rent, refinance, repeat) of buying properties, the appraisal is key to returns, as it dictates how much money you can pull out of the property. We have found commercial appraisals often appraise higher for strong cash-flowing properties, especially once you have the property leased out.

We acquired this 15-unit building in Harrisburg, PA as part of syndication.

Downside to 3-15 Unit Buildings

There are two major downsides to building out a portfolio of 3-15 unit buildings. First, the acquisition of these mid-sized buildings is harder than buying one massive apartment complex. Negotiating terms of the deal, financing, closing, tenant communication, and initial property repairs can be much more time-consuming with 3-15 unit buildings.  

Related: 5 Ways to Jump Up to Large-Scale Multifamily Investing

The other major downside to this approach is the property management time commitment. For an apartment complex, it simplifies things having all tenants in one location due to common property features and centralized geographic location. On the other side, SFHs often attract higher rent tenants, who are usually easier to manage. Owning units across multiple 3-15 unit buildings requires strong systems/partners to make sure rent is paid and maintenance costs stay low.

Final Thoughts

One important note is that there are a ton of caveats, and this was a very broad generalization. Investors can lose or make or lose a lot of money in each investment class. It is just a lot easier to get high returns by targeting unsaturated markets.

We’re republishing this article to help out our newer readers.

What’s your favorite real estate class to invest in—and why?

Leave a comment below!

About Author

Chad Gallagher

Chad is the co-founder of SlateHouse Group . SlateHouse is a property management company in Pennsylvania and New Jersey that manages over 3,000 units, SlateHouse Plumbing and HVAC that works with all investors, and SlateHouse Realty with agents that focus on helping investors buy and sell real estate. Chad also leads SlateHouse Investments, which owns over 200 units. Chad obtained a degree in Systems Engineering from the University of Virginia and previously led the mobile division for Advertising.com which was eventually acquired by Verizon.

45 Comments

  1. Ali Hashemi

    Great article! Many of these thoughts are why I’ve tried to stay away from single family and only go after small multi-fam.

    I would say a few other factors contribute:

    1) Small multi-family are typically run by “mom & pop” who are afraid to push rents. So there is usually quite a bit of value to be gained immediately after purchase by capturing true rent prices.

    2) They require very little hands on management once you have a system in place.

    3) Smaller debt obligation / easier to purchase

    One negative is they get snatched up so quickly. It’s easy for cash buyers to scoop up small multi-family.

  2. Yes, I totally see your point, right now the demand in my area isn’t as bad for these as in the city. I’m looking at 2 right now in a beach town on the Oregon coast. Good luck with your endeavors, but I don’t think you’ll need it as by reading your report you’ve got it pretty well nailed down.

    • Chad Gallagher

      Tim – Thanks for the kind words. Honestly, we still feel that we have a long way to go to achieve our long-term goals. It’s amazing how many little improvements can help your investments perform better. It seems like every month we are figuring out a better way to do something. We’ve never invested in beach towns, but let me know if we can ever help you think through an investment.

  3. Chris Soignier

    I agree that “sweet spot” is probably less competitive for acquisitions, but I still prefer bigger complexes for a variety of reasons:

    1) Economies of scale simply aren’t going to be optimal in such a small complex.
    2) If you’re getting a deal due to lack of competition in that door range, somebody else will probably get a deal when you sell, barring any major supply/demand shifts in that size bracket
    3) More doors (to a certain extent) represent less risk of move-outs, late/non-rent payment, etc materially impacting cash flow.
    4) Lower cap rate means more leverage to increase valuation for every $ you increase NOI.

    That said, I think it’s good to mix up different types and sizes of MF, though I’d stay away from anything under 5 doors since it’s neither valued nor financed as multi-family, and valuation will be contstrained by local comps.

    • Chad Gallagher

      Chris – Good points overall and thanks for the thoughtful reply. Just a few quick comments to add…
      Economies of Scale — Agreed that a complex is the fastest way to get to economies of scale. We do, however, think that you can achieve economies of scale by buying a bunch of 3-15 unit buildings in the same area. This is actually a future blog topic I’m going to write on our experience.

      Interesting point that re-sale value is also lower for 3-15 unit buildings (due to less demand). Our plan is to hold for over 20 years, so the resale value is less of an impact on IRR. But — your comment is 100% correct and worth taking into account. And on this same topic — there’s no doubt that investors of complexes over the last 5 years have seen really strong appreciation, especially if they have increased rents.

  4. Kevin Felmlee

    Chad, I am in the process of buying my first complex in Central PA. Its small but the huge advantage of that 3-15 unit deal is the possibility of seller financing. Seller financing for 5 years is nice because it allows you to pay down the principle enough to have it appraised and then get a loan for the full amount. I have tons of SFH’s and I’m guessing I’ll start selling them to buy complexes soon.

    • Chad Gallagher

      Kevin – Congrats on the new complex buy! We personally haven’t done any seller financing deals, but I totally agree with what you are saying, especially with interest rates so low right now. Thanks for the note — we should meet up sometime to compare notes!

    • David Clay

      Kevin, Congrats. I just did the same thing in N. Florida. I bought a six unit with owner financing. I had a 20k deposit on a 155k purchase, 5 yr amortization at 5%. closed about 9 months ago. Preparing to refi the owner out and pull my original deposit and rehab cash out within the next several months so I can keep going. There aren’t a lot of deals like this in my small town, but I was lucky to find this one thanks to my wife who advised I go to talk to one of our local agents who is also a fellow Lion’s Club member. He had a deal that he hadn’t advertised yet. Lucky all around.

  5. David Krulac

    Hi Chad,
    Welcome to Bigger Pockets. I spoke at Chad’s REIA group in July and He spoke at our REIA group in August and we’ve known each other for several years.

    I like the unit breakdown at 5 to 20 units. Here’s why:
    1. One to four units are are often financed with residential mortgages versus commercial mortgages. Residential mortgages don’t apply to more than 4 units. And residential mortgages are available for both owner occupied and non owner occupied 1-4 units. And for owner occupied 1-4 units FHA and VA mortgages are even available. Residential mortgages are the cheapest interest rates, longest terms (often 30 year fixed), and highest Loan to Value (80% no-owner occupied and up to 100% financed owner occupied).
    2. Many of the buyers for 1-4 units are Mom and Pops, who often buy based on Sales Comparables versus the 5+ buyers who buy based on the Income Approach. Mom and Pops buy at nigher prices than Investors which drives up the sales prices for the 1-4 units.
    3. There are less buyers in the 5+ pool, so less competition and better prices.
    4. And when you get above 20 units, those complexes begins to draw attention of larger players who don’t want to mess with less than 20 units.
    David Krulac

  6. Josh Thomas

    Thanks for the article. I’m curious when you say ‘easiest to find’ are you referring to finding them via Loopnet? How do you find these 5-15 unit complexes? Don’t say networking because I’ve tried going to RIEA meetings and it seems they are only attended by wanna-be wholesalers and tire-kicker investors. 😀

    • Chad Gallagher

      Josh – We actually find most of our deals via MLS. I know that might be hard to believe as many investors are very anti-MLS, but it’s worked for us. We do also have relationships with some legit wholesalers that send us off-market deals, but I agree strongly that the average wholesalers we’ve met has resulted in no deals. We’ve probably met 100 wholesalers, and ended up working with 4, so not great odds…. but did find some value eventually so don’t give up totally on the meetup route. Hope this helps!

    • How about using data provided by ReboGateway? The ability to set equity parameters onto the complexes between 5 to 15 units and layer BK, Affadavit of Death, NOD/Lis Pendens life events certainly would be the way to go.

  7. Aaron Blair

    Great post Chad – I can attest to the 3-15 unit properties being of lower demand in Lancaster City. The 2-unit market on the other hand seems quite competitive. I can’t count how many offers I’ve made well over listing price that were beat by cash, no inspection offers.

    If you’re looking for new syndication investors in the 3-15 unit range, we should talk some more.

  8. Nathan G.

    Great article. The largest complexes in my small town are 16-unit. There are very few of them and they’ll probably never be sold. I have to look at other markets which I’m starting to do. Thank you for sharing this information with us.

  9. Jessie Silva

    I rather get a 9% return on a $45M+ acquisition than a 25% ROI on a $12M acquisition. Thoughts?

    Large institutions are chasing 150+ unit complexes. High demand very low supply. Many times they overpay for them too. I agree with your post, although I would take the larger deals any day if I had the chance especially if i’m going to be selling to wallstreet (;

    But I understand, institutionalized sized deals are hard to come by now a days, so chasing 15+ unit deals might be the best choose. Atleast until theres a national recession/depression down the road in a few years which i suspect and hopefully these big players come crashing down.

    • Deanna Opgenort

      Personally I think I’d rather get 25% on THREE $12M acquisitions, and have an additional $9 million to play around with investing in other stuff…but that’s just me.
      If you are investing for yourself, have unlimited funding, and can only manage one project at a time, obviously the 9% $45M deal would be the smarter option. If you are managing money for investors they would MUCH rather have you working 3x as hard and make them 25% ROI.
      (said another way, if you were an investor would you rather have your guy make $90k, or $250k with your $1M investment?)

  10. yonah weiss

    Chad, Great article. I would like if you could elaborate on the downside you mentioned of more challenging financing and closing. I understand why the other factors you mentioned would be more difficult. Besides for owner financing, where have you found financing sources? We always found best terms with smaller local banks.

    • Chad Gallagher

      Yonah – The downside on financing / closing with this strategy is the comparison between buying one large complex vs many smaller buyers in the 3-15 unit range. So if you buy one complex — you have one closing and one bank financing to arrange. On the smaller deals — you could easily have 10-20X the # of closings and financing arrangements. My experience is that in general each closing and loan is a similar amount of work — regardless of the size of the deal.

      All that being said — I think that you can overtime streamline the work needed for closing / financing so that this strategy can still be doable.

  11. Deanna Opgenort

    Sometime it pays to think outside the box. If you are dealing with multiple structures on one parcel it MAY be possible to increase the value by splitting them into more conventional numbers that the banks understand (and will loan on). My parents purchased 5 units. The property had 3 small cottages, & 2 homes on a very oddly shaped lot that went from one side of the block through to another street (it had originally had 8 structures — others had been split off over the years).
    They split one house off onto it’s own parcel which the odd-shaped lot made very easy). After the split, the parcel with the 4 units were worth at almost the same as all 5 units had been before, while the SFR comped at close to 1/3 of the full original purchase price.
    It’s worth noting that their local planning department is really good — as long as you aren’t trying to pull a fast one or do something unsafe they are usually very cooperative & helpful. Investors in other places may not be so lucky.

  12. Great Article Chad,

    I live in MD and own/self manage 12 SFH rentals around Baltimore. Getting tired of the very tenant biased MD laws so multi family investing outside of MD is of keen interest to me and my group of investors. We purchased a 74 unit rental in Gettysburg, PA last year and its been an outstanding investment so far. We’re looking for more multi unit properties and 5-15 units could be attractive to some or all of us. I agree that reasonable economies of scale can be found in 5-25 unit investing

    • Chad Gallagher

      Glad you enjoyed the article. We haven’t invested into Gettyburg yet, but I’m sure it’s a similar market to markets where we do manage properties like York, Shippensburg, Carlisle, etc. And your experience with better returns than Baltimore totally makes sense to me.

    • Chuck – Would be great to connect on the above. I do a lot of work in Baltimore in the SFR rental and small multifamily space. Would be interested to connect. I think the SFR space still offers attractive returns, although Chad is spot on in the higher yielding aspect of the 5-15 unit market. What kind of multifamily properties are you targeting and in what market?

      • Melanie Hartmann

        Hi Tim and Chuck! I’ve actually been looking around Baltimore or in MD for a 2+ unit property since mid-January. This would be my first investment property. However, it seems like most properties listed as two-units are not zoned for multi-family. Thus, the search hasn’t gone as quickly as I had hoped! Seems like most decent places are now out of my preferred price range from what they had been as I had been window-shopping over the past few years. Then again, the first investment purchase is scary.

    • Chad Gallagher

      Saw a few questions here around “How to find deals for these types of properties”. My experience is 2 ways — MLS and Networking. On the networking side — it took us about 2 years before anything paid off. We really focused on local meetups as a great way to build long-term relationships. We have just recently got a great deal on a 15 unit building from a wholesaler who found the seller directly but it was too large for them to deal with directly. The wholesaler knew we targeted these types of properties, looped us in, and everyone ended up with a win. BUT — it takes work — we probably attend 6-7 meetups each month for the last couple of years.

  13. Varun Parkash

    Thank You Chad for amazing insights. Do you know what other websites/sources are the best other than MLS/Rebogateway to get data on 5-15 unit MF deals? Any free options to look at?

    For newbies who haven’t invested in multi-families yet, your article presents very valuable insights. Appreciate it 🙂

  14. jamie dietz

    Chad- I shared your article with my partners and it started a good discussion. Thanks for the insights. I would love to hear more about financing multiple purchases and structuring the syndication model. I invest primarily in western PA but travel in your area often if you would like to connect?

  15. Chad – This article hits close to home for me. In the financing space, this size of property is sometimes difficult to obtain competitive debt for. I have been looking around at some opportunities in PA and I think you’re spot on in your view on the returns for 5-15 units being the ‘sweet spot’ for CRE investors. Everyone gets caught up in wanting to do larger multifamily, where cap rates are so compressed, it often times does not make sense. Shoot me a direct message, it would be great to connect offline if you have some time today.

  16. Chad,
    Agreed. That’s what we generally buy. Ready willing and able. Class C (maybe c-) to B preferred. Utah preferred but will consider others.
    Best,
    Andy

  17. chris schu

    Great article Chad. You stated:
    “On the other side, SFHs often attract higher rent tenants, who are usually easier to manage. Owning units across multiple 3-15 unit buildings requires strong systems/partners to make sure rent is paid and maintenance costs stay low.”

    True that. Even tenants who’ve been double checked before signing can become a major drain on NOI by unneccesary bad behavior. Unfortunately, statistics prove that with higher rents comes higher quality tenants on the average.

    ALI HASHEMI:
    “1) Small multi-family are typically run by “mom & pop” who are afraid to push rents. So there is usually quite a bit of value to be gained immediately after purchase by capturing true rent prices.”

    Also true. Unfortunately, some of the tenants will instantly turn sour on you (name calling, threats, etc.) even after knowing full well they were living for years at below market rent. Hopefully such tenants will move out and become someone else’s nightmare.

    CHUCK MCEVOY:
    “I live in MD and own/self manage 12 SFH rentals around Baltimore. Getting tired of the very tenant biased MD laws so multi family investing outside of MD is of keen interest to me and my group of investors.”

    “…around Baltimore” – you need not say anything more. National news is just the tip of the iceburg. Locally, it’s a disaster as you found out. Your initiative in looking elsewhere to invest will be worthy of the time spent. Cash out and let someone else babysit tenants who’s “career” it is to literally live off landlords.

    Overall, speaking of PA, be sure to thoroughly research landlord/tenant law and actual court rulings on this subject especially if investing in/near the Pitt and Philly region. Let’s just say a “tenant friendly” biased government is an understatement in many jurisdictions.

    What may appear a great deal strickly by the numbers at face value needs to be tempered by the reality of quality of tenant – that means realistic vacancy, skipped rent, AND physical damage loses.

    Invest wisely my friends.

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