Best Type of property to buy first?

Question

So I am just getting started in this REI world, and I have a few questions

I am pretty young (21) and have a decent paying job, with very good credit. Also, I live in the Raleigh area, which I hear is great for investing. I am just waiting to save up a little money before I dive in to this.

So my first question, should I get a single family home, or a multi family to start out?
Also, what is the best road to take to get to 20+ properties and the quickest way to pay them all off?
Thanks in advance for any responses. I really do appreciate it.

Brandon Turner · Answer

Hey Matthew Palanek - I've got two blog posts that i've written here on BP that might help you out!

1.) How to Start Investing In Real Estate at a Young Age

2.)How to Make a Million Dollars in Real Estate: A Step by Step Path

Hope those help answer your questions! And others will chime in as well, I'm sure!

William T. · Answer

@Jeff S. I would recommend you check out Gary Keller's, The Millionare Real Estate Investor. He explains the different ways people perceive millionaires in real estate. Buy a million, Own a million, cash flow a million. Which one is better off?

I am completely amazed at how good this book has been so far.  I am listening to via my Iphone and I am already amazed at the difference it will make in my future.  @Mike H. if you haven't already started reading this, you are missing out because it is really good.

Jeff S. · Answer

Mike H., you had asked for the quickest way to own a 20+ property portfolio free and clear.  There are many paths to get there and your first property will be the first step on that path.  I'm biased towards mutli's like Brandon is because my goal is similar to yours.  As you add more doors to your portfolio the vacancy rate decreases due to the assumption that all your tenants will not turnover at the same time.  Having multi's also reduces some of your replacement costs since your water heater, roof, etc will apply to more than one unit.  The cashflow generated will be more stable if you have more units to diffuse the vacancy rate.  And it is that cashflow that will allow you to pay-down your borrowing costs quickly.  I would recommend you check out Gary Keller's, The Millionare Real Estate Investor.  He explains the different ways people perceive millionaires in real estate.  Buy a million, Own a million, cash flow a million.  Which one is better off?

Great job starting young, and good luck!

Nik Parks · Answer

Mike H. and David Krulac,

Thanks for the excellent points! I've been going back and forth on the whole SFH vs. MF thing myself.

I've talked to a couple of investors and they've said that, depending on the area, MF's can attract a "rougher" demographic as well. Of course, it varies from market to market.

I currently live in a MF in NYC (I'm renting) and I think it's safe to say that I'm a pretty standup guy :p

David Krulac · Answer

Matthew Palanek

I'd say go with a SFH first, but you can't go wrong going MF either.  I like the financing available for SFH.  Owner occupied you can get 96.5% FHA, 100% VA or 100% USDA.  I like those numbers, and there are other conventional or localized programs that are in the same ball park.

The exit strategy for SFH is to sell to an owner occupant.  In my area SFH buyers are overwhelmingly owner occupants, probably 10 to 1 ratio compared to MF.  That means when you go to sell there are 10 times as many buyers for SFH as MF.  I like those numbers also.  I've sold hundreds and hundreds of properties, and I can only recall one SFH that I sold (that was a rental for me) that was sold to another investor.  All the rest were sold to owner occupants.  These O/O don't care about cash flow, rate of return, income to sales price ratios, GRM, Cap Rate or any other numbers that might interest an investor buyer.  they care about does it look nice, can I get financing and what is it going to cost me per month.

In my experience SFH tenants stay longer, longer tenancy means less vacancy, less re-painting, less repairs, and less time spent re-renting.  I currently have a 1984, a 1997, and other tenants that have rented the same place for more than a decade.  I just lost a 22 year tenant, but don't shed a tear because I sold them a new house.

I've written before about a friend who bought a new owner occupied house every year or so, moving from place to place accumulating those low down payment mortgages, by keeping the old places and renting them out, all perfectly legal.

Ali Boone · Answer

I don't think there is any one right answer to your question, Matthew. Any of those choices would be great investments. There are trade-offs to each choice, but o one right answer. Everything Mike says about SFHs vs MFHs is true, but SFHs are harder because you have to buy one at a time, but they do have better returns and exit strategies, then with MFH are you talking about less than 4 units or more than 4 because they differentiates between residential and commercial loans.

What I would do is dig into all the opportunities you can find, both single and multi. Look at everything, be able to see the comparisons, and then make sure you understand the trade-offs of each, and by the end of it you will know exactly which property you want.

Mike H. · Answer

Actually, it was Matt that asked the question. I currently have 18 SFH rental properties with #19 under contract as of last week.

My one hesitation with recommending multi family is that the numbers just don't work as well as SFH. And you can't use leverage anywhere near as well in multifamily as you can in SFH.

I'm sure there are exceptions. But when you start talking commercial loans, you're going to be looking at 25 to 30% down with rehab out of pocket. With SFH, you can limit your out of pocket quite a bit (to 5 or 10%) by using a hard money lender
and then doing a rate and term refi.

Additionally, I just don't see mutlifamily producing the same income numbers that SFH do. I'd say its about 1/2 to 1/3 the numbers here in Illinois.  So while you may be doing repairs for a larger number of units, you're starting off with a lot less profit per unit to begin with.

And I still go back to those larger properties being a lot more management intensive. If you were to talk about 100 unit properties, then I might agree because you get management built into the cost.

But outside of that, I just don't see any way that the 8 or 10 plex type buildings can compete with SFH in terms of rate of return and ease of management - at least not with how they price buildings here in Illinois.

Mike H. · Answer

I think Brandon's blog is a good start.
I also liked the duplex (you could also do a four plex as well) suggestion as well.

It lets you get a couple doors using only one of your conventional spots and you can put some real good financing on it.

Then after a year, buy your next duplex and move into it so you can get owner occupant financing there as well.

In 10 years, you could have 20 doors all with some really great financing.  That is if you can hold off 10 years before buying your primary residence.

I would say that I would probably recommend doing SFH's just because I think they're going to be a lot easier to manage and you'll have a much better idea on what things are needed with a house.

Also, I don't think duplexes appreciate as much as a SFH. So you're kind of limiting your upside (i.e. eventual exit of selling).

But to start out, I think SFH is the way to go. There is a much different learning curve involved in multifamily (I'm assuming you're talking about 8, 10, 12 unit properties). And they would require a lot more time to manage than SFH just because those are typically apts that have a lot more turnover.

Its much easier for those people to move since they only have an apt full of stuff. But people with a whole house full of stuff are much less inclined to want to move very often.

Benjamin Winokur · Answer

Brandon, thanks for the great info in those posts. I'm in the same boat, being 28 and tying to get things started off on the right track while I'm still "young"

Raquel Baranow · Answer

my mom & dad bought a 2-flat, lived in the first floor (had basement too) and rented the top floor . . . i kind of did the same living in the guesthouse and renting out the main house to students

Best Type of property to buy first?

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