Scaling: Why should I buy single families first then multifamilies later?

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Hey Taylor!First congratulations on taking your real estate education seriously and putting yourself out there by posting on the BP forums. It can be an intimidating thing to do when you are just starting out and asking foundational questions.Second, please keep in mind that what I’m going to share is my opinion and others may disagree. But, my answers are based on my actual experience being a real estate investor for the last 12+ years.I am 41 years old and currently own 160 units. The vast majority of these units I purchased using private financing with $0 out of pocket. To answer the first big question in your post — single family vs multi-family — I am firmly in the multi-family camp. I personally have had amazing success with properties which are between 2 and 12 units, which most people would call “small multi-family.” There are many advantages that small multi-family properties have over single family properties in my opinion. But there are also some disadvantages. And I also think that the inventory in your market plays a large role in deciding what property type makes the most sense.In my market, there is a large abundance of the small multi-family properties, especially the 2-4 unit properties. Additionally, in my market, a lot of these properties are located in areas where price-to-rent ratios are extremely favorable. For example, it is not unusual for me and my business partner to buy 4-unit buildings for about $250k and be able to rent them out for $4,000+/mo. By the same token, single family properties in the same areas, at best, might sell for $100k and rent for $1500/mo. Most of the time, you’re looking at prices in the $150k+ range to get that kind of rent.Additionally, the economies of scale really do come into play when it comes to comparing single family vs. multifamily properties. Our 8-unit buildings have one roof, one foundation, and one structure to take care of. If I were to get 8 separate single family homes, I would 8 roofs, 8 foundations, and 8 structures. The cost to maintain them probably wouldn’t be exactly 8x as compared to the single 8-unit, but it sure as hell isn’t a 1-to-1 ratio either. Additionally, when comparing whether to build a single family portfolio or a comparable multi-family portfolio, you should also keep in mind the transactional costs involved. Each closing, whether multi-family or single family, is going to have some of the same costs: title insurance, attorney fees, inspection fees, appraisal fees, fees associated with financing, etc. To continue with the 8-unit example, you again end up spending many multiples of these costs to build a comparable portfolio of single family properties.Another disadvantage of single family properties is that there is only one tenant per building and if they stop paying or if there is a vacancy, the entire cost of that property is on you and your wallet until you can fill that vacancy and get the rent coming in again. With a multi-family property, it is very unlikely that all of your units become vacant or non-paying at the same time. So, often times even if 1 or 2 of the units in the building are not generating any rent, the remaining rents are still enough to pay for all of your property’s expenses and you don’t have to come out of pocket to cover them. This obviously is not the case with single family properties.With all of this said, single family properties do have some significant advantages over multifamily properties. One, they will likely appreciate more quickly than multifamily properties. Two, the tenants will likely stay longer and there will be less turnover, which mean some savings on turnover costs. Three, the tenants will be easier to manage because there won’t be any bickering or disputes between them and other tenants in the building which is common with multifamily properties. All things considered, I still believe that multifamily properties edge out single family properties. The only exception might be if you plan to and if your market supports short term rentals. In which case, the single family properties might rival and even exceed income potential of comparably priced multi-family properties. However, short term rentals are much less passive than long term rentals and are essentially a hospitality business, which is in and of itself required a whole additional layer of knowledge and expertise.With regard to your question about private lenders, it’s important to draw a distinction in terminology between “private” and “hard money.” Hard money lenders are much more like banks and come with many restrictions, requirements, due diligence, fees, etc. Hard money loans will almost certainly not cover 100% of the property’s purchase price and will require a chunky amount down (eg 20-30%) from you. They will also often carry very expensive interest rates and have other fees tacked on. They often also require appraisals and additional hurtles. On the other hand, true private lenders are not professional lenders and hedge fund type lenders (which is what hard money lenders are), but instead are regular people in your circle and sphere of influence. These people are not necessarily in the business of lending money and loans from them can be negotiated in any number of ways. Most of the private lenders we deal with don’t require appraisals, never set foot on any of the properties they finance for us and, best of all, often finance 100% of the purchase price and renovations. These are entirely relationship-based and do take time and energy to cultivate but are very lucrative once you cultivate them. These people can be relatives, friends, coworkers, friends of friends, and business associates. The key is that they need to know, like, and trust you. There is a lot more I could say about private lenders and how to find them, but this reply is already extremely long, so I’ll just leave it at that. Happy to chat further if you want to reach out to me with a DM.The last thing I would tell you is that, I started my real estate journey with a house hack of a 2-family property in 2011 using bank financing. Not only is there nothing wrong with taking this approach, but I actually think this is the best way to start and the way that 99% of new investors should start their investing journey. You get to kill multiple birds with one stone by following the house hacking strategy. You get to live in a property you own for free or almost free, while learning the ropes of being a landlord and you get very very favorable financing, where you don’t have to worry about finding private lenders or getting into any complicated or exotic investment strategies on your first deal. You do need to have steady employment, decent credit, and not be drowning in debt. But, I don’t think that should be a very high bar for you especially if you are already studying and researching this at 18 years old and you don’t plan to buy anything until 2-3 years from now at the earliest. You can very comfortably and at your own pace set yourself up for a very stable start by strategically positioning yourself to be able to buy a property this way if you start preparing now.I hope this was helpful! Let me know if you have any follow up questions or want to connect more. Good luck!Vitaliy

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Taylor, You are on the right track by asking questions now and starting to learn as much as you can. Vitaliy, gave you solid advice and did a good job of explaining some of the key issues. I would encourage you to learn the market you plan to invest in now and to continue to learn about the different methods of investing. I would also recommend that you do not narrow your investment options. I have been investing in real estate for well over twenty years and can tell you there are a lot of ways to make money in real estate. Your best route might be to buy a 2 to 4 unit property that you can live in and rent out the additional apartments. You could also buy a single family property that you can either fix and flip or house hack. Vitaliy provided some great points about the pros and cons of single family verse multi-unit investing. What I will add is that you may have a harder time finding private money partners willing to fund your investment deals when you are 18 and have no experience. Private investors want to invest in deals they believe will be profitable. Part of that reassurance comes from bringing some experience to the table and a proven track record of investing successfully. Ask yourself would you invest your money with an 18 year old new investor with no experience buying, or managing investment real estate? My advice would be to follow up with Vitaliy and pick his brain as much as he will allow. I would also focus on smaller deals, single family to 4 unit starting out, so you can establish some experience. I would keep detailed records of my deals to include photos that I could use later when I am approaching a potential funding partner. I'm not trying to discourage you from investing, I think it is a great idea. I just want you to go into your investing as prepared as possible.

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I'll keep an open mind, that's a good point, there is tons of ways to do real estate. I'll try to diversify as to not have all my eggs in one basket. I should have a person I know at each of the colleges I'm looking at going to that can give me an insight on their networks. I'm doing my best to prepare now by reading, listening, and asking these questions. Thank you for the insight it means a lot.

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@Taylor Hughs Hi Taylor, I started out investing with 1 SFH. At the time it made financial sense. I then bought a duplex and eventually got bigger. I prefer the multis because there’s one set of expenses and multiple rents coming in. If I were in your position starting out at a young age I would focus on building my credit score first. And I would find a decent job to utilize to help get traditional lending with. I would then find a 2-4 unit deal that I could put down a 3.5-5% down payment on as an owner occupied rental. I would do this every 12-15 months to build my portfolio. This way on a $300,000 purchase you only need $10,500-,15,000 for your down payment which if you maintain a low cost of living is very achievable every 12-15 months. If you don’t mind moving somewhat frequently this is a great way to start your portfolio. Seller financed deals are nice but still often require a down payment as well and can be much harder to find than deals you can finance through some form of lender.

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Thanks Shawn, I'm definetly looking to house hack first and then move from there. I have a couple of people that are family friends or bosses for some of my family members that could potentially be a private investor or cosign a deal with me so I can get a couple of deals under my belt, then move on to scaling more aggressively with other private lenders. I'm following up with Vitality hopefully in the next couple of days and will be sure to pick his brain the best i can. Thanks again!

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Well said John.

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Whether it's your first, tenth, or thirtieth investment, keep an open mind about the types of properties you consider. There's a world of possibilities out there, and each one offers unique benefits. You might find that single-family homes are readily available and could be easier to manage or sell if the need arises. It's about balancing your portfolio and not putting all your eggs in one basket. Being young will present challenges in a field where experience is highly valued not just with lenders. You will need a team of people to work with, including contractors. How will you know when one is trying to rip you off, is lying to you, or what to do if a squatter moves in? It's wise to be cautious and aware. Many players will not have your best interests at heart. This isn't to discourage you but to prepare you for the journey ahead. Consider teaming up with a mentor or a partner who has the experience and is willing to guide you. This collaboration could be a powerful learning experience and a stepping stone to success.

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Vitality, this has been the best reply I have received on this platform yet. I now completely understand the differences, and while consuming real estate content for the past week on this topic, I have also been leaning towards multifamily and this further cements that. I also was considering moving up to Albany when I am out of college due to the market, and I want to live somewhere up North. I really really appreciate this insight and you taking the time to respond. I'm going to try to DM you can talk to you more about private money and starting off on the right foot if you have the time. Thank you so much!