Where to start - Multi-Family or Single Family Homes?

Question

Hello Everyone,

I am looking to start a rental portfolio and need some advice on where to begin. I have managed 180 unit buildings and currently oversee a student hosing building for 201 students. I want to start building my personal rental portfolio, but I need a little advice. Do you think it is better to start with single family units or multi-family units?

During my journey to obtaining my degree in real estate financing, I have found that single family homes cause a great financial burned if the tenant decides not to pay their rent. I have noticed much of that financial burned is mitgaged if you own a multi-family unit. Yes, I do understand their are ways mitgate risk through renting to tenants through housing programs, but my interest relies in buildings with more tenants. Considering that I have work in the property management field for the last few years, I am very familiar with what it takes to keep a multi-family property up and running.

I would love to know how some of you started building your portfolio and what your thoughts are on starting with a portfolio with a higher number of units. I am really trying to unleash my inner Cody Davis energy lol.

Gino Barbaro · Answer

@Imani Naomi

I started with a tri flex, and had no idea how to buy larger properties. I did not have your advantage of working in the industry.

You need to begin where you feel most comfortable, and where you think you can close a deal. Obviously, multifamily has so many more advantages than a Single family home, but can have more barriers to entry.

I would start by learning the business, learning how to syndicate and use seller financing, and then focus on two things if you want to invest in multifamily: Sourcing capital and sourcing deals.

More units allows you to hire staff and create some economies of scale. The more residents you serve, the more money you make.

Gino

Eric Fernwood · Answer

Hello @Imani Naomi,

Deciding on a property type first is not the right approach. Properties don't pay rent—tenants do. When you buy a property, only one tenant segment will rent it. Here's why.

Each tenant segment has specific housing requirements and won't consider alternatives. Similarly, every property has unique characteristics. Tenants will only rent a property if its characteristics match their housing requirements. The diagram below illustrates this cause-and-effect relationship (click to enlarge).

Also, the goal of real estate investing is not to own property. The goal of real estate investing is financial freedom. This is not just about replacing your current income. It's about creating a reliable income stream that sustains your lifestyle indefinitely. So, everything depends on the income, not the property itself. The property is nothing but a vessel to attract tenants who pay the rent. (Click to enlarge.)

To maximize your success, follow the steps illustrated below.

Why select the city first? Because all long-term income characteristics depend on where you invest. If you buy properties in a city where rent increases don't outpace inflation, you can't achieve financial freedom—no matter how many properties you acquire.

For example, suppose you buy enough properties to generate $5,000/Mo, which replaces your current income. And, assume that rents increase by 2%/Yr and inflation averages 5%/Yr over the expected hold period, which I will assume is 20+ years. What will the value of the rent you receive in 5, 10, 15 and 20 years under these conditions.

• Year 0: $5,000 x (1 + 2%)^0 / (1 + 5%)^0 ≈ $5,000
• Year 5: $5,000 x (1 + 2%)^5 / (1 + 5%)^5 ≈ $4,325. Although rents increased by 2% annually, the purchasing power of this income is equivalent to $4,325 in today's dollars.
• Year 10: $5,000 x (1 + 2%)^10 / (1 + 5%)^10 ≈ $3,742
• Year 15: $5,000 x (1 + 2%)^15 / (1 + 5%)^15 ≈ $3,237
• Year 20: $5,000 x (1 + 2%)^20 / (1 + 5%)^20 ≈ $2,800

Due to rent increases failing to keep pace with inflation, you won't be able to maintain your standard of living. Your only option will be to get a job to supplement your rental income.

What if you purchased properties in a city with 8% rent growth while inflation averages 5%?

• Year 0: $5,000 x (1 + 8%)^0 / (1 + 5%)^0 ≈ $5,000
• Year 5: $5,000 x (1 + 8%)^5 / (1 + 5%)^5 ≈ $4,325
• Year 10: $5,000 x (1 + 8%)^10 / (1 + 5%)^10 ≈ $5,756
• Year 15: $5,000 x (1 + 8%)^15 / (1 + 5%)^15 ≈ $7,629
• Year 20: $5,000 x (1 + 8%)^20 / (1 + 5%)^20 ≈ $8,783

Income reliability is crucial for financial freedom, and it hinges on the tenant occupying your property. To have a reliable income, you need reliable tenants. Reliable tenants stay for many years, pay rent on schedule, and take good care of the property. Unfortunately, such tenants are not commonplace.

To maximize the odds of always having your property occupied by a reliable tenant, buy properties that attracts a tenant segment with a high percentage of reliable people. How do you find such a segment? Ask 10 to 15 experienced property managers: "What properties would you buy if you wanted tenants who stay for many years, pay rent on schedule, and take good care of the property?"

I conducted a survey in 2005 when I launched my investor services business, and 13 out of 15 property managers described the same properties. The tenant segment we've targeted for over 17 years is families with elementary school-age children and a gross household income between $65,000 and $85,000.

The only properties this segment will rent are:

• Type: Single-family
• Configuration: 3+ bedrooms, 2+ baths, 2+ car garages, 1,100 to 2,400 SF, one or two stories, lot size 3,000 SF to 6,000 SF.
• Rent range: $1,800/Mo to $2,300/Mo
• Location: See the map below for the areas where our target tenant segment chooses to live.
•

Type: Single-family

Configuration: 3+ bedrooms, 2+ baths, 2+ car garages, 1,100 to 2,400 SF, one or two stories, lot size 3,000 SF to 6,000 SF.

Rent range: $1,800/Mo to $2,300/Mo

Location: See the map below for the areas where our target tenant segment chooses to live.

What has been our results following this process?

• Average tenant stay of over 5 years.
• 7 evictions in 17+ years out of >1,000 tenants.
• Income reliability: Our clients had zero decrease in rent and zero vacancies during the 2008 financial crash. Property prices plunged, but rental income continued uninterrupted. We achieved similar results during the COVID-19 pandemic and the eviction moratorium.
• Average rent growth and appreciation from 2013 through 2023: >8% and >15%, respectively.

Summary

Properties don't pay rent; tenants do. Therefore, identify a tenant segment with a high concentration of reliable people through property manager interviews. Once you know the properties they currently rent, buy similar properties. The properties could be condos, single-family homes, multi-family units, etc. The property type doesn't matter. What matters is income reliability.

Jackson Hanssen · Answer

Confirming what @Siraj Alsafar said, you can 1031 any real estate held for investment or business purpose, including SFRs.

To comment on the bigger thread, commercial is generally better, but requires more capital. Residentially is a little more messy and has more risk but is easier to get into.

Robert Rixer · Answer

Don't get caught up in unit counts. Unit count is mostly an ego thing. When starting out, you need to be looking for the absolute best deal you can get your hands on whether it be a SFH or duplex, triplex, etc.

Drew Sygit · Answer

@Imani Naomi sounds like you have field experience with MTR. What experience do you have in the financial side of the business?

If you have a good grasp of the financial side, you should be able to raise the funds to buy & manage an MTR.

Sam Maropis · Answer

I want to throw my 2 cents in on  this. First I am going to disagree somewhat with Charles Seaman somewhat. I want to separate the size into maybe four groups. Single, 2-4 unit, 5-15, units and over 15. Granted 15 is a number pulled out of the hat so to speak.

If you have experience in larger multifamily and if your funds are somewhat limited, then I would recommend a duplex to 4 unit. You can still buy them vie traditional financing. Additionally if you can live in one unit for a year, then you can get the best of both worlds, better financing and a larger than a single family home. 2-4 is a great place to start, shop around for pricing and see what is available. Best would be two bedroom and maybe one three bedroom, in that four unit. but that is a good dream.

If you have to go with the single family, try to get a 3/2 home, much better tenants than a smaller 2/1.

Marcus Auerbach · Answer

I would start by thinking who do you want to rent to? Once you know who your tenants will be, you can answer the property question on several levels, not only SF vs MF, but also location, size, features etc

If you design a car, you start by thinking about your target audience and what they want. As you can appreciate with your background your audience creates your experience as an investor.

PS I am in camp SF, because I wanted the least amount of effort while I am traveling, which used to be for my corporate job, It's for pleasure and we take 6 trips every year with little to no issues

Justin Moy · Answer

There's a saying I really like in the REI space..everybody goes from single family to commercial. Nobody goes from commercial to single family.

With your experience I'd think you could do great in either, but you will have a big advantage in the asset management portion of the investment which is huge.

It will likely come down to cash on hand. If you want to do things on your own then you'll have to look at your own cash position and qualifications for loans.

If you're looking for partners you can focus on looking for cash partners that will really open up your options for commercial deals.

Brandon Weis · Answer

In general, many people start with SFH's because they have a lower barrier to entry being that there are more of them and they are generally cheaper than multifamily. SFH's can carry more risk as you can quickly lose 100% of your revenue if a tenant stops paying, but they also generally come with more tenant stability. It is much easier to get long term-tenants (5-10+ years) in single family homes than in multifamily. Like everything else, there are tradeoffs.

However, you mentioned being in an area with students, so SFH's in your area may operate more like multifamily units anyways with higher turnover.

Charles Seaman · Answer

You're welcome @Imani Naomi.  I'm familiar with the general concept behind different creative financing strategies, but have never used them personally.  All of my deals have used different types of conventional financing strategies.  Aside from what you'll find here on BiggerPockets, you can probably some good creative financing nuggets on the websites below.

Single-Family: https://masterpassiveincome.com/

Multifamily: https://pauldavidthompson.com/

Where to start - Multi-Family or Single Family Homes?

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