Why tie my money up in SFR and not an 8-unit money factory?

Question

When I look at investing in a SFR versus a multi family property, I can't help but feel like I should just strive to put together a deal on a 4-8 unit building.

Is there anyone experienced out there who in hindsight wishes they had pushed straight ahead to multi family?

John Chapman · Answer

I'm in your area, and I absolutely hate small multi units (four units or less) in our area.  I wrote a long forum post a while back on why I hate fourplexes in our area.  (Can't figure out how to find it.)   There are so many reasons, but here are some of the highlights:  (1) they are valued on the sales comp. approach; (2) they are hard to finance because they are valued on the sales comp. approach (comps are hard to find); (3) it's much harder to find deals on them (more sophisticated owners with inflated senses of value); (4) they tend to be clumped together as opposed to interspersed in SFRs, the result is that other landlords actions have a much more significant impact on the operation of your property; (5) you don't achieve any economies of scale (they're too small); (6) they are more management intensive (anytime people share walls, there's always going to be drama); (7) they tend to be illiquid (see point 2); (8) they have more turnover than SFRs; (9) unless you're getting good deal on one, they don't cash flow that well; (10) a lot of them have owner paid water.  I could go on.  I will put the caveat that some people love them and make money with them.  I also would say that I think small multi's work great in different parts of the country, just not here.  (Obviously, there's exceptions to every rule.)

Ellis San Jose · Answer

@Zachary D.

I have done both sfr's and multi-units over the years.

I agree completely with Jon Holdman's opinion on institutional financing and his take on less liquidity & exit strategies.  For 5+ units, loan terms are potentially dangerous with higher down payments, balloons & ARMs. They are a recipe for disaster.

So, in hindsight, the #1 thing that I learned was to consider the rate of return on my time.

The tenant base is remarkably different for multi-units vs. sfr's. Generally speaking, you will experience more intensive management, greater demands on your time, and especially, higher operating expenses & turnover with a multi-unit property vs. houses.  Even if you can make a decent profit by hiring professional management, long term they still aren't my first choice as far as asset class.  I got sucked in spending more time on oversight, management & operating issues than on dealmaking which is a more valuable use of time.

I'm not saying not to do it, because there is money to be made in any sector depending on your skills & situation.  But for big picture long term evergreen income I am not a big fan of apartments.

Jon Holdman · Answer

I assume you're talking purely about rentals.  SFRs are easier to buy, you can get 30 year fixed loans (at least when you're starting out) and can more easily dispose of the properties if you decide to get out of the business.  At least around here, I've found no good deals on small apartment buildings, and I have been actively looking.  Its hard to find good SFR deals, too, but that was possible during previous years where all small apartment buildings were very expensive relative to rents even then.  If you're buying 5+ you're limited to commercial financing.  That means larger down payments and shorter loan terms and maybe ARMS or balloons.  The shorter loan term can really cut into cash flow.  So, even if you find equivalent deals for SFR vs. apartments your cash flow will be lower on the apartments.

Engelo Rumora · Answer

Hi Zachary,

Multifamily has always been of interest to me but I decided to build a cash only portfolio with SFH before jumping on board with Multifamily.

SFH is lower risk IMO due to the $$$ amounts being smaller.

Starting off with SFH will definitely get you well prepared for the complexities that investing in Multi's will throw your way.

Thanks for reading.

Nick B. · Answer

@Zachary D., have you considered being a passive investor in a large MF syndication?

Pros: It limits your risks to the amount you invested. You have no personal liability of any kind. Your time commitment is minuscule. You may diversify into several deals.

Cons: your returns are less comparing with owning the entire building by yourself. You have little control over the execution of the business plan.

Joseph Weisenbloom · Answer

@Zachary D. I started off in your shoes wanting to multis but over time my opinion has changed. I guess it comes down to what kind of investing you are trying to do and what you want to achieve. I personally want stable passive income with little management involved. SFR's generally have less turnover, high quality tenants, lower expenses and less management. Multis have more cashflow but more risk, more management intensive and higher expenses.

Not to say they are worse just more active on the active vs passive spectrum. In addition the economies of scale wont make sense to hire an onsite manager until you get in the much larger buildings like 30+.

I notice you are a local DFW guy and you may notice that the inventory for the type of building you are talking about is bone dry. Meanwhile SFRs are more abundant and cheaper.

Gerald Harris · Answer

It depends on what your goal is

fix and flip or buy and hold?

Buy and hold, go for the units.   More cash flow & you can live in 1 rent free if you wish

if you want a quick exit strategy go for the SFR.   As I grow as an investor the more attractive units become.   Its residual income (Money coming in without time going out) if you structure it correctly.

Zachary D. · Answer

@bryan

@Bryan L. Yes, I do. I've listened to all of the Bigger Pockets podcast content and read about everything they've published. Also, my original post was written about 7 months ago and I've consumed a lot on the subject since then. Thanks for looking out for me, though. :)@Nick B. No, I haven't made that consideration. I'm interested in passive income and accruing equity for the long term.Chris Soignier Thank you for the SFH and MF comparison. The valuation methods tend to mess with us new guys. Weighing both hassles and dollar values of these two REI models is a bit tough at first, I find. Thanks again!

Chris Soignier · Answer

I went straight into MF, and am a passive in 3 deals for the pros @Nick B. stated.   Although cash on cash return isn't as high as in SFR, I have much more upside potential due to the valuation method of MF.

Bryan L. · Answer

You do know that it is actually possible to LOSE money investing in rentals don't you?  And the risks can be even greater (and different) with MFs.

Why tie my money up in SFR and not an 8-unit money factory?

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