Ideal Single Family Portfolio size?

Question

Hey all,

A little backstory - I’m in the process of locking down my second single family rental property. The neighborhood I have focused on is a C neighborhood with 2-3 bedroom homes in rentable condition going for around $50-65k.

My long term goal is to 1031 in to some sort of multifamily project. Given the time frame restrictions of a 1031, I was curious what some of you have found to be the “sweet spot” number of properties that you can sell off in a grouping in a reasonable amount of time.

My plan is to get 5 properties in this market before I look to diversify (geographically speaking) Is that too large of a grouping to sell off together?

I appreciate all of your input!

Bill B. · Answer

Don’t forget. During the last recession mfr rents and vacancy got crushed while SFR stayed occupied and rents continued to climb. Plus when you go to sell your SFR you can sell at or above market to an ooc because they love the house. We always knew investors were cheap and would low ball you, but now with 10 years “offer 30% less than ARV minus all the repairs” being drummed in to investors heads, why would you ever want to sell to one unless you had to.

as far as the ideal portfolio size I think it depends on prices/rents. I retired with 6 that cost under $150k each, rented for $1200 and cashflowed $600.  That gave me $40k per year, basically tax free after depreciation. It’s not a lot, but it was more than I needed. Then I bougth another 6 as time went on saying, that’s big enough, I don’t need any more. So I picked up only a few more over the next 5 years.

For the properties I described you’ll make $120k year tax free (for 27 years until depreciation runs out) with property managers and spend less than 4 hours a month “working”. In the end you’ll have a little over $4 million in equity you can get a tax free loan against if you need it. Again there are people who probably did that or more their first year, more power to them. It doesn’t come out fo my pocket.

The reason I specify the property prices/rent is because I’ve listened to podcast where people have 12-15 properties or “doors” but they are $50k properties renting for $500, in which case you might need twice as many doors and twice as much work to get the same results. Or you might have twice the price at twice the rent and get away with 1/2 as many.

The process took me under 4 years of buy a new primary and a new rental each year. (The primaries got better rates at lower costs with less down. So feel free to go 1/2 as fast and just buy a new primary every year for 10 years, if you’re spouse will put up with it. Or you’re “lucky” enough to be young and solo.)

Alyssa Dyer · Answer

@Daniel Rasmussen I know a lot of investors selling two off at a time. These are all in the 60-80k range. They offer them individually normally but consider providing a discount to add on a second. I think five is a great number that's big enough for a bigger player, but small enough to be approachable at that price point.

Daniel Rasmussen · Answer

@Bill Brandt Bill, thanks for the thoughtful response. It’s always great to hear the first hand experience of someone who has already been there/done that.

You’re right that timeframe and amount of cashflow per “door” is a big variable when considering all this as well.

Daniel Rasmussen · Answer

@Alyssa Dyer thanks for the reply, you make a good point. A possible need for discounting is definitely worth taking into consideration as well.

Daniel Rasmussen · Answer

@Jaysen Medhurst I understand people have strong opinions on SFR vs. multifamily rental properties. My decision to start with single family boiled down to a few factors.

1. Limited capital. Im 25 years old currently, and was in my early 20’s when I picked up my first rental. Instead of waiting 5 years to save up for a multi-unit property, id rather find the quickest way to get my feet wet and start cashflowing, and then take steps to expand from there (hence my question).

2. Learning curve. When I bought my first rental, I didn’t even fully understand the home buying process as a kid just out of college, let alone how to navigate owning/managing an out state multi unit building. Making a mistake on one (or a few) $50,000 single family homes seemed a lot easier to recover from that a six-figure multi unit property.

3. Liquidity. Sure a 1031 might be more complicated with several SF homes, but individually speaking I think they’re a lot easier to dump if you find yourself in a pinch. Im sure if you have the right pool of buyers you can sell a multifamily property easily enough, but I feel pretty strongly that generally speaking, days on market are going to be a lot less with a one-off SF home if you’re pressed for time than a multi unit property.

Jaysen Medhurst · Answer

0, @Daniel Rasmussen, that's the ideal size. Sorry to be cheeky and I know some investors have great success with SFR, but I just don't get the appeal. Why spend a year or more accumulating 5 SFRs when you could easily get a single property with multiple units for less work?

The 1031 constraints is just one more reason to avoid SFRs. You may be able to sell your small portfolio to another investor when the time comes...you may. If you have an 8-unit building and decide to trade up, you're selling one property, and you're doing it all in the same community of investors, some of whom may just have the perfect property for you to buy.

Ideal Single Family Portfolio size?

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