Quadplex or four SFHs?

Question

Michele Fischer · Answer

Ignoring the resale aspect, I'd also argue that is is easier to manage SFR rather than multi's.  You don't normally need to do lawn care for SFR.  You don't normally have as many disputes to referee with SFR's - no shared walls to hear each other through, no common areas to argue over, no pointing fingers when the exterior looks like a dump.  You can generally set a looser pet policy with SFR's.  And a looser criminal criteria if you choose to (level 1 sex offender or domestic violence, for example).  One tenant won't know when you are replacing the kitchen of another property and ask for the same.  If one is vacant, you don't have to wait until 10am to make noise, you can work the hours you want to.  Multi's are fun, but SFR's are less work.

Bryan L. · Answer

@Jon Huber I didn't post that about the risks just for your benefit alone, but also for all others who may read this.  I've been active on BP long enough to see the trends.  Newbies come on here with very unrealistic expectations every day.  And some will be reading this post a year from now.

And there is more to it than realizing that there are risks.  I hope that you (and I, and everyone else) understand the types of risks, and the possible severity of the risks.  We all need to understand risk from a perspective of "possibility or probability of an event occurring".  But I want us all to think about risk from the perspective of "severity".  For example:

Let's say that a barrel holds 90 good apples, and 10 bad apples.  The risk of a blind-folded person randomly selecting and eating a bad apple is 1-in-10 (10% probability of occurrance).  The severity of selecting a bad apple is a tummy-ache.

Now, let's say that another barrel holds 50 good apples, 40 extremely great apples, and 10 little round hand-grenades (about the same size and shape of an apple).  In this example, the probability of a "great choice" is higher than the first example, and the probability of a bad choice is the same as the first example.  But the severity (consequences) of a bad choice are far more severe.

Which barrel should one select?

I think that it's a similar situation with investing.  The consequences of a bad investment in multies can be far more severe than the consequences of a bad investment in single-family homes.  Does that mean that one should totally avoid multies?  No.  But, we should all know and understand the consequences as well as the probabilities.

Not picking on you Jon, but most newbies here on BP have never even gotten this far in their knowledge, but they want to jump into a barrel and start making their fortune without ever understanding the potential down-side (both probability and severity).

Annette Hibbler · Answer

I'm partial to SF's because as you stated, you can sell them off one by one if you decide to.  Also, the appreciation is greater than a 4-plex.  SF can be sold to both investors and homeowners.  Whereas, with a 4-pled or any MF, you're mainly limited to other investors and sales typically take longer.  Also, sounds like you'll gain instant equity on each SF house which of course is a very attractive bonus.

That's the reason why my own portfolio consists mainly of SF's.

Jean Bolger · Answer

@Jon Huber

My first place was an owner occ duplex. But it was an over/under duplex that I later sold to another homeowner who planned to use the whole space, not rent out. The only SFR that I've bought is the one I live in now.

Because I've had a fairly low income most of my working life I have always been nervous about being on the hook for another full mortgage payment. So the duplex/triplex thing worked well for me. Those properties never generated huge cash flow, but I was in a neighborhood that saw some pretty crazy appreciation so the real payoff came from selling them after holding them for about a dozen years.

But really, this could have easily been a "hand grenade" scenario (to use @Bryan L. 's analogy). I didn't know much when I bought those places. It was the crazy neighborhood gentrification that saved my bacon. For example, I sold my triplex to a developer (as a scraper) for 100k more than I bought it for. But if that neighborhood had remained flat, I would have been in big trouble with an older property that needed major systems replaced and no money to do it. Was I smart or just lucky? Probably lucky, lol!

I think that idea of level/severity of risk is an interesting one to contemplate. I think that when you are young and poor you are more impervious to those severe risks. There were certainly plenty of years in my life where the threat of losing everything I had just wasn't very scary... because there wasn't much to lose ;)  Now I am more cautious. Of course, if I blow it I don't have as much time to make up for my mistakes

Pete T. · Answer

@Jon HuberI think in the situation you listed however, the SFH would be favored.  Besides there only being one transaction and one loan on the multi, I dont see why I would prefer it to 4 SFH if the cost and cash flow is the same.  Multi's typically have more turnover, different tenants, more maintenance, and more headaches "owning the neighbors"  When I have looked a small MF (2-4), it was bc the cost per door was much less, but the CF was only slightly less.  The SFH's for me are easier to rent, better tenants, more appreciation, and easier to sell.

Jon Huber · Answer

@Jean Bolger   Congrats on your recent 29-unit acquisition! That is a level I would like to be at. I completely agree that SFHs are much better for resale. I was thinking more for a buy & hold strategy, as opposed to resale. I am in the same situation as you, when it comes to a pension. I am looking at this as a "401k", and not a "flip". I know that I would eventually have to part ways with the property at some point, but if the cons always out weighed the pros, no one would ever buy multies. When did you feel you were ready to move to multies from SFHs, or did you always focus on multies?

Jon Huber · Answer

@Bryan L.  I completely understand that there is a risk in REI. I may be a "newbie" on the investment side, but I have had my RE license over ten years and have experience on the other side. To piggy back on my last post, having most of my experience in NYC and LA, multies are more common than SFHs. The returns on SFH in the metropolis areas are never positive, so I would be looking out of state. Just another reason I would consider multies over SFH... not because I believe them to be "safer".

Also, thanks for the glass is always full logic. By that logic, I can say that a financial loss is never a true loss, as long as I learn something.

Jon Huber · Answer

@Richelle Thomas I agree. Perhaps I am looking at this purely from a selfish stand point. SFHs are more ideal to live in as a tenant. Financing and upkeep would be easier for me with a multi. Also, maybe its just my "city" mindset I have, as only ever living in NYC & LA metro areas, I have never actually lived in a SFH myself.

Bryan L. · Answer

That example above should have said 10% less instead of 100% less.  Can't find the edit button anymore.

Bryan L. · Answer

@Jon Huber and @Bruce Lam

- The key point that I want to make (and most newbies on BP do not know and understand) is that it's actually possible to lose money in real-estate.  And that risk is compounded with a multi.  But for some reason that is beyond my comprehension, many newbies get this false idea that multies are "safer".  Now, it's true that you have other doors to being paying the rent when a unit goes vacant (compared to the scenario of having only 1 sfr which results in 100% vacancy when it's vacant).  But there are other expenses and other risks with multies.  For example, more maintenance typically (parking lot, yard maintenance, trash, snow, etc), and typically higher turn-over with a multi.

But here's the worst part.  If for some reason you end up with a bad property and you make less on it than you expected (or even negative cash-flow), then the value of the property goes down as well.  The value of a multi is more a function of it's performance (or lack of) whereas the value of a SFR is more of a function of it's comparable cousins in the area (what they sale for).  A badly performing sfr can often be sold to an owner-occupant.  And they aren't going to ask to see your tax returns.  Say for example that your SFR rental actually rents for 100% less than you thought it would ($450 per month instead of $500 per month for example) and lets say that maybe this same SFR has a bit higher vacancy and turn-over than you expected.  When you go to sell it - sell it to an owner-occupant.  They don't care what your numbers were.  But, on the other hand, if your multi has similar kinds of performance issues, you could end up having to discount the price significantly to get rid of it.

This isn't about glass-half-empty or glass-half-full.  Plenty of people are making good money with multies.  But there's also a ton on newbies on here who do not realize that there is a very real possibility to lose one's ass with multies.  Even worse, many newbies falsely believe that multies are "safer" than SFR.  And that just ain't so.  (of course, one can lose money with SFR too, but the depth of the loss can often be deeper with multies).

By the way @Jon Huber - the glass is neither half-empty, nor half-full.  It is 100% full, consisting of a layer of water topped by a layer of air (50% and 50% by volume, but not by mass).

Quadplex or four SFHs?

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