SFRs Vs Multi-family rentals

[Raul Pelcastre]

Advantages & disadvantages???

[James Park]

Raul Pelcastre,

I have asked this question many times. When I first joined BP, I had a misconception that single family homes is where everyone starts and eventually graduates to commercial building or large apartments. I was on a mission to find out what is the best asset to buy for my personal retirement portfolio. 

I took out several successful commercial brokers and even wealth managers out to lunch to ask them what their retirement portfolio looks like. None of the commercial brokers I met owned any commercial properties like office buildings, wareshouses, or retail etc. Several owned single family homes and multi family, few owned apartments, and some surprisingly did not own any real estate. Surprisingly most of the wealth managers I took out to lunch did not own any real estate investments other than their primary residence.   

I talked to a couple very successful buy and hold investors where their net passive income was close to $200k/year. They owned a combination of single family homes and multi-family. The issue they had with multi-family was that the average tenants only stayed 9 months, and also there were disputes among the tenants about who is responsible for maintenance. Some tenants would even gang up on the landlord and there was a quite of bit of wear and tear in the units every time there was a turn over. These successful buy and hold investors did say that they would not mind exchanging their single family homes for a good 1or 2 large apartment complex in a good area.

A disadvantage of selling an apartment building or commercial property is that the buyer will be another investor. This investor will negotiate to get the best price and terms that he can get. He maybe a better negotiator than you.

Also Investment property can experience large swings in value as the economy changes. An empty office building or commercial building will sell for a small fraction of what it cost to build.  

A major advantage of investing in several single family homes rather than one big apartment or office building is that you can diversify by investing in different price ranges. By owning both less expensive ad more expensive houses, you can have the safety of the lower priced houses and the upside potential of the higher priced ones.

Therefore I concluded that I only want to have a combination of single family homes and possibly an apartment building in my retirement portfolio. However, if I never own an apartment building in my life, I am completely okay with that.  

If I do own an apartment building in the future, I will have the understanding that this is a business and needs to be treated like a business, not a passive retirement income portfolio like owning a portfolio of 30-40 single family homes located in good solid neighborhoods.