Single Family or Multi-Family??

Question

Hello BP friends!

My business partner and I are relatively new to the investing world and are on the hunt for our first property.  I have been spending every moment I can devouring every book, podcast, forum post, and anything else that mentions the words "Real Estate".  With every market I research and deal I analyze, this little voice in my head grows louder.  The voice is telling me, "You're wasting your time with SFR's."

We have the capital, and we have the risk tolerance.  Which makes me then ask the question, should we just jump into apartment complexes?  I've been reading numerous books on the topic as well so that I'm not a total newbie, although I'm as close to it as they come.  I don't see the value in spending an equal amount of time searching for the needle in the haystack house in the grand hopes of cash-flowing $100-500 with current market conditions.  I understand that the acquisition and management of an apartment complex is, well, more complex.  At this point when I take the economies of scale into account, the only benefit I see for an SFR is the practice of going through the entire purchase process.

Not to discredit the value of first-hand education.  I was the valedictorian at the school of hard knocks, and sometimes I feel like I've never left.  I just can't shake the feeling that I'd be wasting my time going for anything less than a 10-unit at the absolute smallest.

So, now that my near nonsensical rambling is complete, here's the real question of the post.

If you didn't have a capital barrier to entry, would you pursue larger multi-unit properties over SFR's?

If you've read this, far, I thank you very much and look forward to seeing some insightful feedback!

Aaron Weitzman · Answer

Hey! @David Matheson, we ended up going with a fourplex for the first property. I took the advice of @Jon Schwartz higher up in the post. It just makes perfect sense at the moment! Low fixed mortgage rates with multi-family cash flow and residential appreciation. We're in central texas and the numbers make sense there.

Ned Carey · Answer

@Jai Reddy The savings and loan crisis was caused by some poorly designed tax policy that incentivized making bad investments. The savings and loan companies (pretty much like a bank) made some very bad loans on these properties.

When the tax code changed, all those money losing properties became bad loans. The Savings and Loan companies could not make up for their bad loans and lost significant money. As I recall many people went to jail.       "Can this not happen with fixed 30 year residential loans no matter what happens to the banks?

Yes this can absolutely happen with fixed 30 year loans. This is what happened in 2008-2009. While the loans were 30 year fixed, many of the loans went bad. Many who could pay chose not too because they owed more than their proprieties were worth.

Now if you have properties that are cash flowing very well which allows you to keep up payments your risk is low.  However what if the economy tanks so much that tenants cannot pay? Your rents received could drop and you could loose properties. I view this as very low risk.

A more likely mid term result, is high inflation which will make your property value and rents rise. Anyone who chooses lower rates over a fixed rate 30 year term right now is a fool. J Scott just wrote a facebook post about this in the last few days.

Ned Carey · Answer

@Aaron Weitzman it depends on which will give you a better ROI. In my market I can do better with SFHs.

I believe Multi family to be overpriced right now. There are many reasons but to make it simple, cap rates are historically low. This means prices are historically high. All the drivers of mult unit pricing have swung towards higher prices. What happens when some of those factors start to swing the other way.

If cap rates go from 6% to 8% then you have to increase your Net Operating Income 33% just for your building to maintain its value!  What if rates and values change when you loan comes due or resets. We could see a crash unlike anything since the Savings and Loan Crisis.

Of course that is just one point of view.

Jon Schwartz · Answer

Thanks for calling me out! I'm glad I could help!

Best,

Jon

Jason Wray · Answer

I would have to venture into the construction of new MF, Apartments or Condo's.  Good credit, cash flowing properties and either cash from a property or DP from liquid source.  You find the appropriate sized piece of land and build from $1MM-$7.5MM.  Typically need a DSCR of 1.20x in a top end 80% LTV with a Int-Only 20YR Hybrid ARM.  In a hot or upcoming market I would start with this and borrower from the cash flowing units under an asset optimizing loan going forward.  Money makes money!

Jon Schwartz · Answer

Texas property taxes will get you! CA taxes are the highest in the country except when it comes to property taxes (in that department, we're the 16th lowest). Thank you, Prop 13!

I invest in LA County. I know that LA, and the whole state of CA, gets poopoo'd on quite a bit in these forums, but there are advantages that suit me well. For starters, you can invest a good deal of capital on a fourplex, allowing your money to go to work without having to take on the mortgage risk of commercial property. LA's an appreciation market, not much of a cashflow market, but I have income from outside of real estate, so I'm focusing on wealth building, not replacing the W2. I target LA properties that have a 2% cash-on-cash and excellent prospects for appreciation -- either because the location is amazing or the rents are well under market.

There's a big push amongst the gurus that bigger is better, but they're using the wrong metric. They equate bigger with more doors; I equate bigger with more capital.

Aigo Pyles · Answer

One of the advantage of SFR properties for a real estate investors novice is the capital requirement. It requires less down payment. Another one is that it is easier to sell single family homes compared to multifamily homes. Some might consider buying the property/properties to be their home/s not just rental property anymore.  And these days due to the pandemic, it will be less riskier compared to multifamily homes might have shared ventilations / hvac system.

While with multifamily homes, scaling is faster. You can live in the multifamily home as well and of course, higher cash flow.

Taylor L. · Answer

If you're remotely investing from California? Absolutely, go with bigger properties, as long as you have the capital and risk tolerance. If you're not comfortable doing it on your own, partner with someone.

Bryan Noth · Answer

@Aaron Weitzman it depends on your target market and specific REI strategy.

SFR has the simultaneous advantage and disadvantage of its value being based on desirability and location.  If you buy smart the value can increase tremendously.

Multifamily still benefits from those aspects, but also can fluctuate based on rental amount as well.  Multifamily has a big advantage with economies of scale with multiple units

Jai Reddy · Answer

@Ned Carey

Ned, you’re post’s often open my eyes a bit more. Never heard of the Savings and Loan Crisis. Looked it up and barely understood the gist but, bottomline, banks can screw themselves up and then come after our callable or rate-reset commercial loans to make up for their screw up.

Can this not happen with fixed 30 year residential loans no matter what happens to the banks?

Single Family or Multi-Family??

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