If no MFRs are available then...?

[Andrew Vaught]

Hey BP community,

I’m new to the real estate game in the southeastern Louisiana region. I’m still in the process of learning as much as I can through books, the podcast, and picking my mentor's brain.

I live in a nice college town area that is fairly small but by no means tiny. I'm interested in buying my primary residence in this town and would prefer to do so with a duplex or triplex. The issue is that there are few MFRs on the market and none of them are good deals. My question is since MFRs aren't plentiful where I live, should I get a SFR instead? Decent 3/2s here run between 120k-160k, and In doing so start building equity for future investments.

I appreciate any input!

[Marcus Auerbach]

@Andrew Vaught I am a big fan of SFRs and our portfolio is almost exclusive SFRs. Nothing wrong with duplexes, quads and medium or large MF, it's just not my cup of tea.  

Here is why I like SFR:

- most passive investment

- typically more income per unit

- easy to buy, rehab and finance

- easy to sell if I ever wanted to and for full retail

- good cash flow

- excellent opportunity for appreciation

- most $$ per tenant in rent and equity (I want to turn high $$ with a low number of tenants)

The first point is the most important to me. I used to travel internationally all the time for my job and could not put up with managing MF as I found out quickly. SFR are fully self contained units, there is only one tenant and so there are no interactions between tenants. Lawn care, snow removal and garbage are the job of the tenant, I am not responsible for any work. We target homes in better school districts and our tenants move here for the schools; they are usully long term tenants, which keeps turn over cost low.

About that: our average rent is about $1,500, so when a tenant calls me to move out, that's a $5,000 phone call:

- one month vacancy $1,500

- re-leasing, one month rent $1,500 (okay I self manage, but my time is worth something)

- clean up, paint, carpet etc (wear and tear, not covered by SD) $2,000

So, based on that it's easy to see why we do a lot to keep our tenants happy.

- during initial remodel we finish the basement as a family rec room

- our homes are nice and modern: new kitchens, bath, recessed lighting, stainless steel etc

- we do NOT raise rents, at least not inside of the first 3-5 years (this would be a sin on a MF!)

Here are some disadvantages of SFR compared to MF:

- not as easy to scale to a large number of doors (very few people will own more than 30-50 SFR)

- more paperwork: one mortgage and one insurance policy for every single tenant

- value is only a function of appreciation, forced or natural, not a function of income

- only one tenant under each roof 

The last argument only holds water for medium and large MF, because on a duplex the roof is literally (almost) the only thing you don't have duplicates for: 2 kitchens, 2 bathrooms, 2 HVAC etc) - Many of the arguments made for MF do not apply in my opinion for 2/4 family (Small MF). True MF starts IMO as soon as you have on site management. Smaller MF (2,4, 6, 12 units) is a hybrid of attributes of both worlds, both their advantages and disadvanages and one should be very clear about that. 

Regardless of what vehicle you choose, you should always start with the definition of your taget audience: who is the tenant segemnt you are targeting? Most investors make the mistake to let the building define the tenants, once you have bought the property you have no say whatsoever in the type of tenants you will have. That is a function of the property and the neighborhood, in our case the Milwaukee suburbs.  For example, we target families with double income and professional careers and kids, who want to be in a certain school district. And we want tenants who have a strong emphaasis on living in a beatutiful home, as they are very likely to take better care of our properties than someone who just needs the cheapest roof over their head possible. This gives us income stability, they are less volatile than single individuals or couples. And they pay higher rents.

When I started out with my duplex I thought that there is only a tenant market for lower income tenants with rents between $600 and $800 (rents were about 20-25% lower ten years ago). I was not aware of rentals for $1500, $2500 or $5000 - of course the segements become smaller fast as you go up in price, typical bell-curve distribution - but there are markets for all of them. Most of our tenants would qualify for at least an FHA mortgage, they just choose not to.

So, whatever type of property you choose there are certain pro's and con's, but you can be very successful with any category!