Single Family or Multi-Family?

Question

So I'm looking for that "first deal" and I love the idea of Duplexes or Triplexes for all of the benefits that many investors who love them rave about, but all of the ones that are in the price range that I am looking at are in much less desirable locations and I know the higher turnover rate would cut into cash-flow as a general rule compared to a SFH. That being said, should I go for the triplex in a worse location with lower rents or that SFH in a nicer area with higher rents and less turnover? As a newbie, I'm apt to go for the triplex for the experience (if the numbers were equal, that is), but the logical side of me knows that the SFH would be lower risk and potentially higher appreciation and easier to sell when I'm ready to exchange it into a larger property. Thoughts?

John Teachout · Answer

My personal opinion is that anybody starting in real estate should begin with a lower price single family fix up home. There's a learning process involved with real estate investing and there's a lot more exit options with an SFR. If you decide multi family is where you want to wind up, then it can always be sold, or kept, or whatever... It's just a lot safer investment from a potential loss standpoint. (due to financial or management failures)

Bud Gaffney · Answer

@Katherine Earle multi ! House hack all day

Nick Robinson · Answer

Exactly I think it is easier to finance and the numbers just make sense. The property I bought is actually in Mesa, AZ suburb of PHX. I personally would try not to buy things in tenant friendly states. There is just too much risk involved in it. If I did buy another investment property in CA it would have to be a screaming deal and have a plan of a shorter-term hold to 1031 out of the state.All markets are different, and I know the North and MidWest regions are holding up better but for the country we have seen a pretty big decline in median home prices since June. I know CAR just released their numbers and CA saw a 14% drop since June and a 2.8% drop YoY. Considering the poop has not hit the fan yet I think we will see a higher probability of downward pressure on home prices in the near term. I know Dave Meyer/BiggerPockets is excited about the CPI coming down to 6.5% but you have to think about why it is coming down. He is correct there is a massive delay in the shelter component but if you annualize the last 6mo MoM CPI numbers it is 1.9%. If the only thing holding up the MoM number is housing, we are seeing deflation not just disinflation. If you look into the labor data, you can see major holes in it showing weakness. Amateurs look to the right of the equal sign professionals look to the left.

That being said we are still nationwide up about 20% since Dec '19 prices and I believe rates were around 4-4.5% so we are a long way from even hitting those numbers.

Katherine Earle · Answer

Actually, I was arguing that exact fact to my partner just yesterday. It’s much cheaper here than in CA. So, we typically see $100k/door, but Im getting a duplex right now for $170k. When I bump up to market rates it will be bringing in $1800/mo with a 30-year fixed. The hoops we are having to jump through to secure the financing is ridiculous though! My poor partner has his own business and house-hacks with a house his parents own, but are passing it down to him. The money he got was from an inheritance and it has been a bear to get past underwriting. I’m struggling to find resources on how to secure financing when I’m a new investor, in order to do a cash-out refinance at a later date though. He is fine acting as the private lender in the interim. Just considering if we should just buy another 5-unit with his remaining cash or get a few single family fixer-uppers. I like leaning towards the 5 unit idea though, since none of us have your typical 9-5 jobs for easy residential financing.

Nick Robinson · Answer

@Katherine EarleMy personal opinion is to keep scaling up to bigger MF properties. The further you get away from 4units the easier it is to qualify b/c they are basing it off the property's financials and not your own. In addition, you start to get the economies of scale. Obviously either works but having extra doors helps keep CF more consistent over the year. It keeps all your units in a similar area, so it is easier to manage and cheaper from a PM point of view. When I bought my 14-unit it cost me $135k/door and I put about $30k/door in reno so all in for $165k and the single-family homes next to the building were high $300k-low $400k. I was able to buy a lot more doors and the rental rate between them was not as dramatic as the price.

Jevon Shaw · Answer

It sort of depends. Would you be house hacking the duplex/triplex?

Edit: sorry - accidentally replied to the original question my bad

John Teachout · Answer

Will these multi-families be your first properties?

Single Family or Multi-Family?

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