Single-family or Commercial?

Question

Hello everyone!

My wife and I are fairly new to investing in real estate. We currently operate a single STR and are looking to invest in a single-family multi-unit and/or commercial 6-12 unit property.

If we have the opportunity and ability to "skip" the 2-4 unit step and get into commercial 5+ unit opportunities, should we do it? What are the main pros/cons of doing this?

From the research we have done so far, it appears that the commercial 5+ buildings/opportunities are more lucrative and provide much more cash flow. We would need a bigger downpayment on a larger loan obviously but other than that we are having a tough time coming up with reasons not to invest in the 5+ commercial opportunities vs the 2-4 unit.

Thanks for any help!

Nick & Amy

Eunice Villarroel · Answer

I agree with all of the above comments 100%. I'd definitely invest in bigger multifamily properties if I had the chance. Something I would like to mention is that LOCATION MATTERS A GREAT DEAL.

try your best to get your properties in good areas so you get good tenants.  The multi families I own here in south Florida were in lower income areas (AS MOST MULTI FAMILIES ARE) however I noticed that the location was close to beaches and airports, and gentrification was taking place where developers were moving in and building new construction. That's why I purchased it and so far I have great tenants and great appreciation.

Ive seen lower income area multifamily in bad neighborhoods sit on market 60+ days which is unheard of in South Florida, I've driven by these homes and seen tenants leave piles of trash out in the yards, broked down junk cars,  and a few drug transactions so I can only assume they are not good tenants.

LOCATION MAKES A DIFFERENCE.  PLEASE DONT OVERLOOK THIS

Nick Belsky · Answer

@Nicholas Litchfield

From a financing perspective, there are some differences.  Being commercial doesn't necessarily mean you need more down... I do commercial loans on the similar properties all the time for 25% down.  Your FICO and experience will determine what LTV will be required.  More importantly, most lenders will use the Debt Service to cover and qualify the loan.  The calculation is close to the same for 1-4 units however, many will add an expense factor in... usually 30-35%.  Some lenders will request T-12s to determine the actual ratio, but some fix it and that's that.  Then the DSCR requirement is usually boosted up to 1.15 to 1.3 or more... The DSCR thresholds can knock your LTV down as well.  5+ opens loan options for 5/10yr Treasury backed notes, 5/10yr SWAPs backed notes with balloons, vanilla 30yr fixed, ARMs, Interest Only, etc... there are a variety of loan options out there.

Then you have unicorns lenders... those that will do no DSCR requirements if your property meets the right conditions.  It allows higher LTVs without a increased price adjustment.  I've  been pricing similar properties out at 75LTV, 750+ FICO, 30yr Fixed rate, no balloons, between 8.49-9.49% at par.  You can buy down to as low as 7.49%.  They have other options as well, but they are very flexible and make max LTV very easy for commercial properties.

Cheers!

Carl Millsap · Answer

@Nicholas Litchfield trust me if I could I would've make the leap from single family into 5+ earlier.

1. Reduce the chances of having to cover the mortgage. Single family tenant doesn't pay, you still have to cover the mortgage. In a multi as long as you plan / screen properly the bills will get paid. Know your numbers.

2. Profit is significantly higher. Single family depending on mortgage etc. the goal is a few hundred per door / per month. Multifamily we're talking thousands in profit per month.

3. Net Worth - Unless you're in a high appreciating market for single family, you can't beat the increased net worth that comes from multifamily.

Does it cost more to get in the game, yes....but the upside is greater.

You will have more potential tenant and maintenance issues, but it's a small price to pay for the benefits of multifamily ownership.

I can't stress this enough.....Know your numbers inside out. Develop, and implement systems for tenant screening, maintenance etc.....and know your numbers inside out.

Bjorn Ahlblad · Answer

@Nicholas Litchfield measured on a per dollar invested my 12 unit provides a much better return compared to my duplexes. Make sure you are underwriting correctly. Contact some lenders early just to make sure you understand the differences in loan requirements and payment streams comparing loan programs. Always get your own numbers as best you can pro formas are misleading at best!

Nicholas Litchfield · Answer

Thank you everyone for the helpful information and insight!

You have confirmed our initial thoughts on the benefits of commercial 5+ and given us excellent avenues to explore.

We will keep all of this in mind as we continue our journey into real-estate investing.

Cheers!

Nick & Amy

Single-family or Commercial?

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