Growth without SFRs? How?

[Chris H.]

Hi BP community- longtime lurker, rare poster. I've seen many, such as Ben Leybovich, decry SFR properties, but I have a hard time understanding why- from the perspective of a smaller investor.

I work full time, and on the side, I've done a couple flips and own a few rentals.  Since the rentals don't bring enough income for me to quit my job, I continue to work full time and save what I can.

I see a lot of people talking about how multifamily homes or apartment buildings are "better"- but since you have to put large down payments, or agree to owner finance deals that usually don't give you a huge margin- I don't really see how so. It's quite hard to find apartment buildings or multifamily units that are undervalue, since they are usually investor-owned- meanwhile, SFR's seem to be where you can find the most market inefficiencies.

I've been buying SFR's undervalue, fixing them up, and doing a 75% cash out refi to get my money back, enabling me to buy another (and flip or refi again). I'm slowly growing my cash flow and my actual cash base (through flips and savings).

I keep seeing suggestions to look at apartment buildings, but I feel like the moment I buy an apartment building- there goes my cash pile, since it has to be 20% down! So focusing on SFR's seems to enable the most growth for me.

Am I wrong?  Is there a way for me to obtain apartment buildings that doesn't immediately tie me up?

My goal is to hit enough cash flow to be able to safely quit my full-time job.

[Kenneth Reimer]

@Chris H. I really like what @David Thompson said about more moving pieces, very accurate. While there is much more going on, you're able to achieve the bandwidth to have more support staff, so you can start operating from 30,000 feet, as compared to in the trenches.

To answer your question, multifamily is much more predictable in regards to appreciation than SFRs. This is due in part to how they are valued. As I'm sure you know, the comps of the home you are looking to eventually sell influence the value you will be able to realize when you bring it to market. In multifamily, the profitability will be the major factor in the valuation of the property. If you are able to consistently find undervalued property, and you're able to translate that skill into multifamily, then you'll be able to add multiples to your bottom line, just like your current business plan. 

Another point, you mentioned the 20% down payment on the property. No matter what type of building your buying, you'll still buy the same relative amount of building to your dollars invested. The only difference there is you might be able to argue that you're putting more eggs into one basket. But to that same point, your time and efforts will reach economies of scale, as you'll be the war time general overlooking a much larger operation. 

Another large advantage to multifamily is the dynamics of vacancy. Depending on how many units you have, a vacant unit or two accounts for a much smaller percentage of your overall vacancy than does an SFR. However, more units means more people, and people require work.

One last point I'll make that is not in favor of multifamily which I believe is not talked about enough, is the mindset of the tenant. I've found that tenants in apartment buildings don't take much pride in the home/space they occupy, and thus punt every tiny repair to the management/landlord. Occupants of SFRs take more pride in their home, and they're more apt to fix small things around the home, or mow the lawn, etc. 

Overall, multifamily is almost necessary to scale your business to critical mass levels, depending on what your goals are. I see SFR investing as a great step to get to multifamily, but I would personally choose multifamily over SFR every time. However, there is much to be said about choosing your niche and dominating in it. A jack of all trades, but a master of none typically doesn't make much money.

I hope this helps!

Kenny Reimer