Should I buy Multi or SFR in my situation

Question

I consider myself new to investing as i just recently am looking at real-estate as a business rather than hobby. I have 4 SFR and 1 Multi (4plex) currently under my belt. So more or less I have experienced both to an extent.

Here is my dilemma, I am in the process of fixing up the 4flex (cosmetic) to get a cash out. I may get something around $80K. I have another $30K saved up. So give or take $100K.

I have 3 options,

• 1.Buy 2 SFR and make $900 each = $1800 a month (In a B area)
• 2.Buy 3 houses and make $800 each = 2400 a month in a (C area)
• 3.Use this money as down payment to buy an apartment which after payment would probably bring in somewhat similar cash flow (In a C area).

Pros and Cons

• 1.In the future I may be able to refi and get the cash out but finding this is very challenging.
• 2.May not cash out as property value may not appraise cash gets stuck but does not add to debt
• 3.Not sure how if property can be refinanced due to area. Cash is stuck and there is huge debt.

Any advice would be great

David Krulac · Answer

@Adnan H.

Why limit yourself?  I've bought apartments and houses, who says you can't do both.  Analyze each potential purchase and the ones with the best returns and the best fit for you, that's your answer.

Adnan H. · Answer

Here is some more background info and I will try to ans some the question to the best of my ability.

• 1.How difficult is it to find B-properties with the criteria you're looking for? – It is more or less like chasing unicorn in my local area. (Orlando, FL / Sanford, FL).  If I go 2 to 3 hours away I can get plenty but I am not familiar with the area at all (Jaxsonville, FL) . I did some research and finding 3/2 Block home that would produce $900 is difficult but not impossible. May be I have to wait for a while to get a deal. Also I only want to stick with block construction which tend to be more expensive.
• 2.The bank I work with they have a policy that they would not lend below $50K, so property value has to be at least $65K. (I h=use these banks due to religious restrictions). So buying a $30K house means I am stuck with 100% cash in.
• 3.I am looking to get out of debt and have enough doors that can help me sustain without a 9 to 5 job. I am currently working fulltime and I want to eventually do real estate fulltime.

Reading the reply brings me to a different question: Should I look to leverage all properties that I have or should I try to get them paid off first? I have 1 property that is complete paid off... Should I look into refinancing it and taking cash out?

I have not done any commercial loan yet so I am not sure abt the term. Is 10 years max for all commercial loans?

Jonathan Makovsky · Answer

@Adnan H.congrats on already being in the game!

Tough to answer this kind-of question, because it is so personal. Some people love the SFR game because they find it lower maintenance, others feel the opposite and rather everything under one roof. You can probably read literature on BP that will entertain you for days (if not longer) on this topic. The same can be said buying in B-class vs C-class properties, there are pros and cons to both.

Part of it will come down to the area you invest in, but the biggest factor is your personal one - what do you like best?

The only other comments I have relate to your pros and cons:

1. How difficult is it to find B-properties with the criteria you're looking for? If you'll be chasing unicorns and it's not really possible, then maybe this is not even an option. If it's something possible, then what is challenging about it? Will it take too long to find that your money is going to be sitting on the sidelines for too long, or will it take up too much of your time?

2. I'm not sure I really understand this point. When you say property won't appraise; are you referring to appraising to get all of your capital out, part of it, or it just won't appraise to what you're paying for it.

3. Also, not sure that I understand this point either. When you refer to refinancing and cash getting stuck, what do you mean by that? Because if you're looking at 5 or more units then you will need a commercial loan and you will almost for sure need to refinance down the line (likely in 5 - 10 years).

If you're looking to find a deal that you can refinance all your cash out within a short time period (1 year or less) and have your NOI cover your debt service then I think they are all good options, and it just again comes down to a personal decision. (If you want my personal preference assuming they are all good deals, it would be 1) apartment building, 2) B-class properties and 3) C-class SFR's.)

Best of luck!

Mike Makkar · Answer

@Adnan H.It sounds like you've done the financial analysis already. One answer I'll give is your comfort level with debt and how quickly you want to cash flow. If you're young and don't need the money and up for the learning experience of dealing with a MF, go for that. But if you're middle aged with family / kids and want to use the cash flow to supplement lifestyle, take the less riskier investment of B/C SFR's.

I for one is in a similar cross roads; currently weighing in the opportunity to buy a C-grade 106 unit vs. a 16-portfolio SFRs. Both scare the hell out of me; but given my place in life, I have to take the less risky one and go for the SFR.

Also for MF's, make sure its cash flowing well. There's way too many MF's sold for higher prices than otherwise. Some experts say there'll be crash in MF soon.

Anthony Chara · Answer

You answered your own question, Adnan. When you stated that you are "looking at real-estate as a business rather than hobby", means to me that you should start buying apartments which are greater than 4 units. When you buy apartments, you are actually buying a business that produces a stream of income.

My 2 cents anyway, but I'm very biased! lol

Adnan H. · Answer

MF:

Here is an example of a 12 unit multi – Asking price $500000, each unit currently renter for $700.

Unit price roughly $40K producing gross $700.00. There are 6 separate duplex next to each other.

Area – now sure, its 2 hours away and I have not seen it yet.

SF: B Area:

Found one asking $69K avg rent in the area is $950. No work needed

SF: C Area:

Found 1 for 20K – needs another 15K of work total $35K – will rent for $800 (Section 8)

I have never done section 8 but I heard both ways abt it. I know money is on time but tenants can we painful. I believe any tenant can be trained ?

Adnan H. · Answer

I will work on some numbers to with area with details info and post it; hopefully tomorrow.

John D. · Answer

Would you share some more numbers with the group, to help us help you?  What is the purchase price, debt service (if any), rents, NOI after capex main prop man etc., and what is resulting cashflow, etc. in these 3 scenarios?

Don't rule out using a portfolio lender that will give you a blanket loan, by wrapping a few cheaper properties into one loan.

At the end of the day, I'd apply a discount to cashflow on lower end "C" properties (or two discounts, one because of the lower class of tenants, and one because you'll probably be delayed in pulling cash out -- and model the cashflow assuming you can get a blanket loan).  After applying the discounts, you can compare the various scenarios head-to-head on a cash-on-cash return basis.

Watson Smith · Answer

I wouldn't be buying any apartments right now... There trading at such low cap rates.  Honestly, I'd work on paying your debt down until the market dropped a bit.  Using leverage is good until the market flips on you.  Your going to find it hard to get a good loan one day if you keep pulling money out on each property and have nothing in them.  Best of luck.

Jeff Kehl · Answer

If I understand correctly option 1 and 2 are no financing and option 3 is with financing? Why is that? Do you find it hard to get financing on lower priced properties?

What I try to do when facing a choice like this is to base it totally on math. How much you can expect to receive after all expenses divided by how much cash you invest.

If you're only able to get financing on #3 I would guess your ROI would be highest there so that is likely what I would choose.

However, to do this correctly you should also do an honest assessment of the appreciation you can expect for each of the three choices and take that into account.

Again, totally guessing but I'd say you'd do better with the appreciation of number 1. Low end houses and multis do not seem to appreciate much to me. I've looked at the history of all of my properties and found I do better with the houses in A and B areas. So that's mostly what I have been focused on recently.

So I'd choose option 1 with financing. Even better if you can find some that are a bit distressed, buy them for cash, use the BRRR strategy and refinance and take your money back out.

Should I buy Multi or SFR in my situation

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