Multifamily vs Single Family?

Question

I'm considering making the leap from single family to multifamily, but I'm unclear on what the real advantages are to multi. I own 3 single family houses in a great town that is growing quickly. Recently, I read the Multifamily Millionaire, Wheelbarrow Profits and I've listened to the Grant Cardone podcasts on BP. However, I'm still not really sure of the advantages of multi over single. I hear that the main benefit of multi is that my wealth could grow exponentially, but that doesn't really make sense to me because I still need cash for a down payment. I can afford to buy a single family home each year. Because multi would take more, I could only buy one every 2-3 years. That seems like it would actually slow me down. I'm trying to wrap my head around how that would build wealth quicker. I'd appreciate any comments!!!!

Candyce Chen · Answer

Hello @Rob Duhon

Small Multifamily (2-4 units) would work in some markets/cities, but it might not cash flow in another. Vice versa. Here are some advantages IMO. Those might not apply to your area.

1. Less expenses: one repairing cost/one roof/one exterior/one insurance/one contractor/one loan application…etc.

2. Easy to negotiate down the Property Managment Fee % b/c it’s 2-4 units vs. one unit.

3. Multi is cheaper per unit than SFH to purchase in some cities:  Small towns’ multifamily price could be comparable to some Midwest cities’ SFH.

4. Higher cash flow: 2-4 rent income vs. one. For a Triplex, I can still get 2 rents, rehab the vacant one, and stay cash flow. Basement closets/storages and parking spots can be rent out.

5. Risk diversification: multiple rents vs one check. Vacancy cost is lower in some nice neighborhoods due to high rental demand.

6. Loan Application: Easier on a commercial loan application & better to get a partnership for someone with a multifamily experience.

7. You can still turn SFH into Multifamily:

Having 4-6 SFH cluster together in a renter area, then tear those SFH down to reuse the land and to rebuild a condo at the existing land/area. You can get a higher cash flow per unit in the end, assuming the revenue can cover the builder’s cost within the loan terms.

Hope it helps! Candy

Timothy Hero · Answer

2-4 units typically offer better cash flow than SFH. Anything over 4 units usually brings a little more of a headache. Many lenders change financing structures, appraisals are based on NOI, and appraisals costs way, way more than a 2-4 unit.

Jason Stubblefield · Answer

I think @Robbie Young was most accurate when it comes to your question about speed.  You can make purchases faster with single family but you'll grow wealth quicker with multifamily. The reason is that you you have much more growth opportunities.  Making a $1M from a single family flip is almost unheard of yet it isn't that unreasonable at all with multifamily.  The reason is that properties are evaluated on income approach.  24% growth in single family means the market just has to appreciate by that much.  24 % growth in multifamily means you increased income by 24% over 1 year which is easier to do. Example if a property makes 100,000 per year, 20% growth is an additional $24,000 per year.  However, you have 12 months to do that so... $24000/12 = 2000 per month.  Now divide this by however many units and you see that this sort of growth is very reasonable. With a 20 unit property this would be a $100 per month increase and there you have it.

Eric Fernwood · Answer

The type of property you buy is not important. What matters is selecting properties that best enable you to meet your goals. For rent rest of this post, I will assume your goal is to augment your current income or to replace your current income over time. In either case, you are looking at long-term performance, not initial ROI.

If this is the case, select properties that best meet the following:

• Appreciation - Prices and rents are increasing faster than the inflation rate. If not, your buying power is guaranteed to decline over time due to inflation. Evaluate appreciation based on the 10 years preceding COVID; the high COVID appreciation rates are likely to be short-lived in most locations.
• Targets the right tenant pool segment - Every property attracts a fairly narrow segment of the total tenant pool population. Determine which tenant pool segment has the highest concentration of "good" tenants and only buy properties that will attract this segment. I define a good tenant as someone who:Has stable employment in a market segment that is very likely to be stable or improve over time.Does not engage in illegal activities while on the propertyDoes not cause problems with neighborsPays all the rent on scheduleTakes care of the propertyStays for many years
• Has stable employment in a market segment that is very likely to be stable or improve over time.
• Does not engage in illegal activities while on the property
• Does not cause problems with neighbors
• Pays all the rent on schedule
• Takes care of the property
• Stays for many years
• Low vacancy costs - Vacancy costs can turn what appears to be a profitable property into a money pit. Vacancy cost is a function of the tenant pool, carrying costs, time to rent, property manager skill, construction and renovation materials, lease agreement terms, and local regulations governing tenants. For example, below are typical annual vacancy cost estimates for the three major Las Vegas tenant pool segmentsTransient: $3,200/YrPermanent: $400/Yr Transitional: $3,500/Yr
• Transient: $3,200/Yr
• Permanent: $400/Yr
• Transitional: $3,500/Yr
• Low maintenance cost - The only way to keep maintenance costs low is to not buy properties that need a lot of maintenance. Maintenance cost is a function of property condition, age, climate, construction and renovation materials, tenant pool, and property manager skill.

• Has stable employment in a market segment that is very likely to be stable or improve over time.
• Does not engage in illegal activities while on the property
• Does not cause problems with neighbors
• Pays all the rent on schedule
• Takes care of the property
• Stays for many years

• Transient: $3,200/Yr
• Permanent: $400/Yr
• Transitional: $3,500/Yr

If you base your property selection on the above, you will make the best decisions. Do not make selections based on dogma or what others say. You are the person who will live with your decision for many years.

Melinda McDonald · Answer

Good a.m. -

If you can find small MF (2 - 4 ) and that is tough right now and the numbers make sense, that would be my recommendation.  You can spread the risk a bit if one unit is vacant for a few months.  There is a bit more work as you have more tenants, but that is where a good property manager comes into play.  Please reach out if you would like to discuss.

Best,

Melinda

Forrest Williams · Answer

Another great aspect of multifamily is vacancy. If you have a vacancy in a SFH, you're paying the mortgage that month. But with a multi, your mortgage is covered (at least partly) so you take less of a hit.

Bud Gaffney · Answer

The advantages are...more units, more cash flow :) Multi = Gold!

Marc Rice · Answer

It's a lot easier to manage 100 multi family units than 100 different single family houses scattered around town with 100 roofs, 100 foundations, 100 heating systems, etc. There's more economies of scale in multi-family and its easier to stabilize on scale.

Jim Kalish · Answer

@Rob Duhon well first let's define single family and multi family so what I say next will make a little more sense. From a banking, loan, and building permitting standpoint a single dwelling with up to 4 units is single family. 5 and up is multi family. So from the standpoint of obtaining a loan it's 2 very different worlds. Single family get residential loans. The bank gets an appraisal based on comparable sales and gives you a percentage. LTV. I know you understand all this. And the loan is almost always in a personal name. 5 and up are commercial. The loan is all about income. Or more specifically DSCR. Which is debt service coverage ratio. You have to be able to show that your income is usually 1.25 times the debt. But when they figure the debt they identify a lot or expense than most of us would. So it's tougher to get the loan. And when you need to pull a permit, which we all do eventually, the commercial property needs a contractor with a higher grade of license. With all that said even though I only own properties with less than 5 units I truly believe larger is the way to to. Everything gets spread out over more doors for each property. The purchase price per door should be less.  Expenses are spread out over more doors. Cap x savings and expenditures are spread out over more doors. And you should be able to handle a higher short term vacancy rate with turn overs before you have to dig into your reserves. So if you can the leap go for it b

Robbie Young · Answer

For your question, I would put SFH, duplexes, triplexes, quadplexes, and really small apartments in one group and Multifamily in the other.  There have already been some positives of multifamily mentioned above but the real positive to multifamily as far as wealth generation is that they are valued differently.

A SFH or quadplex is valued by comparable sales.  True multifamily is valued by its income.

You have a quadplex and rents go up by $25 a month.  This does not change the value of the property.

You have a 50 unit apartment building.  Rents go up by $25 a month per door.  That would equate to an extra $300 year per door and $15,000 year for the complex.  Assuming this apartment would sell for a 5 cap, this would equate to an increase in value of $300,000.  The goal for many is to buy an apartment complex where the rents are below market so you are already looking at increasing the rent by $100-$200 a door and you are looking at a $15,000 per door remodel which will let you raise rent by another $250.  So for our exemple let’s say you were able to raise rents through increasing to market rates plus value add by $400 month on a 5 cap for a 50 unit complex this would increase your value by $4,800,000.

Investors like Grant Cardone are looking at doing 300-500 unit apartment complexes.  Multiply that $4.8 million by 6-8 because of that many times more doors and you see the wealth generation.

Many investors will just keep flipping to larger and larger complexes to get there.

Multifamily vs Single Family?

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