SFH, 2-4 units, or 5+ Multifamily - WHY do you choose one?

[J. Martin]

Me: 2-4 units (including multiple houses on 1 lot)
Location: SF Bay Area; Richmond, Oakland

Why?
1) 30yr fixed rate financing. I plan on owning the "fix and hold" properties I buy for AT LEAST a decade, and as of now, plan on retiring on them. Long-term fixed rate financing at this point in the interest rate cycle (below 5%) lets me take rent increases over the years to my bottom line, rather than sharing those increased rents with lenders over the longer-term, in the form of higher rates, when they go up

2) More concentrated than SFH, so I don't have to end up with XX properties all over the place. I'll end up with 1/2 to 1/4 of the total addresses by doing 2-4 instead of just SFH. Because I'm holding for the long term, I'm not very concerned about any lesser marketability, or specifically about any extra appreciation that comes from SFH buyer's desire to have that special home. The property should appreciate through increased rents in places with no buildable land, large differential from high and increasing housing costs nearby, close to employment centers with reasonable commute distances, and close to public transportation and freeways. MF would be even more concentrated, but the 30yr fixed rate is more important to me.

3) Less $/ft than SFH. (And more than MF). The cash flow (CF) is generally better on 2-4 units than SFH. The initial CF is better on MF than 2-4. BUT, that is just for the initial period, typically 5 years (if it's 10 years fixed, you're already looking at close to the 30yr fixed rate on 2-4 units..)

Drawbacks: Still have more addresses than MF, higher $/ft than MF, higher INITIAL rate MF, limited maximum number of 30yr fixed conforming loans you can get, higher expenses than SFH (utilities, etc), lower $/ft in rents in 2-4 compared to SFH..

This discussion is for @Chad Standish so we don't clog up the meetup posting too much. @Account Closed has SFH and condo (and looking at MF). I have 2 and 4 unit properties. Ironically, my 2 unit is 2 SFH on one lot (you can't tell. fence in between. lot just never split). I like these kinds of properties, because detached housing with private yards get a big premium here. So you get the SFH $/ft rents, with closer to the 2-4 unit $/ft price.

[Account Closed]

J,

There's no right way or wrong way. It depends on where we are in the cycle and personal preference. If I have a choice, I would only own SFHs, maybe townhomes and even condos... gasp....I no longer hate HOA with a vengeance like I used to. I don't really care for 2-4 units because of their location. I don't care for MF that are located immediately adjacent to other MF.

When condos were selling for $150k, duplexes were selling for $350k to $400k and 4plexes were selling for $650k to $700k, it was a no brainer for me to buy condos because the probability of these condos to outperform 2-4 units were much greater. During the top of the market, these condos were selling for $400k in while duplexes were selling for $700k-$750k and 4plexes were selling for $950k-$1M. Apparently, condos were mis-priced due to HOA delinquency being greater than 15%, and financing was impossible to get. Some newer complexes were under litigation so financing was dead. The loophole was buying them for cash and obtaining a HELOC on these condos. HELOC is being treated like a consumer loan and not a mortgage.

Fast forward to 2014, these identical condos are selling for $300k-$325k while duplexes are selling for $550k-$600k, and 4plexes are selling for $950k-$1M. Buying condos paid off. Another thing that I discovered is that you can get a $150/month premium in rent with condos that have inside washer/dryer and diswasher. MF generally don't have these amenities.

That fact that it no longer makes sense to buy condos and even 2-4 units is because the price/door is much higher than with condos and 2-4 units. You can buy $200k-$210k/door with MF while you have to pay $300k/door for condos, $275k/door for duplexes and $250k/door for 4plexes. With respect to financing, it's 3% for MF with a 5/1ARM while it's about 4.5% for 2-4 units with 30-year fixed now. That means if interest rate were to rise 300 bp from today, it's about break-even to service the debt in year 5 - 10 for MF compared to 2-4 units. 5/1 ARM with 10 year ballon is huge in my opinion. Something that you can do with MF, but cannot do with 2-4 units is forced appreciation. If I owned these MF by myself or with just one partner, I'd find a way to add inside washer/dryer and dishwasher for each unit and collect the $150/month premium rent. I'm still evaluating this MF model as I go along.

As mentioned above, I'd prefer owning SFHs over 2-4 and MF any day. However, we are in a middle of a housing cycle where it makes more sense to own MF than 2-4 units. That's all.

We can debate until the cows come home on how high interest rate will go up in the coming years. I still remember when people were screaming we're going to have hyper-inflation due to the massive printing of USD in 2009. 5 years later, we have lower interest rates compared to then.

With the stock market in correction mode in the recent weeks, Janet Yellen has already back-peddled on her QE forecast. In my opinion, interest rate cannot go up while we still have inflation below 2%. Interest rate cannot go up with low loan applications, low refinance, and low volume home sales. Banks have to come up with creative ways to make a profit now because the volume of business in their mortgage department has dried up. The economy is still improving at a very slow pace. Of course, if I could lock a 30-year fixed mortgage at 4% or less, I'd do that any day. At 5%, I have to think twice.