Sell SFR and buy multi-family?

Question

Beka Shea · Answer

I think most of the people on here who are in growth mode would say cash-out refi.  But it depends on what your sweet spot is.  At the end of the day, how would you feel about having all those buildings in your portfolio?  Are you looking to streamline into larger multi-units or just to increase your number of doors?  Once you answer that question, the next step becomes a little clearer.

Andrew Campbell · Answer

@Stephen Masek  We've made the transition to apartments after looking at it.  I've outlined the main reasons in a blog post you can read here, why I think apartments are a better investment than SFR. You're right about needing to find a place that you can fix up and raise rents on--which is our business model.  And certainly the property you described in California is never going to work out.

But since you are already investing out of state, you might consider looking at bigger multifamily properties out of state as well.  The economies of scale push it over the top for me. Good luck!

Andrew Campbell · Answer

I'm thinking through similar questions right now.  We have a decent portfolio of duplexes and fourplexes, but recently committed to larger complexes and closed on a 202-unit last week.  I don't really want to sell the properties because they are appreciating like crazy in Austin.  At the same time, they don't offer the economies of scale bigger complexes command.

For me, it really comes back to your goals and risk tolerance--as mentioned above.  I think we will ultimately move these properties and 1031 into larger complexes, but its a tough decision for sure.

Good luck!

David Faulkner · Answer

I'm a bit unusual and a contrarian, but I prefer to lever up after a market correction/crash when great deals are more plentiful, let the equity build as the market recovers, and then deleverage when the market is hot. The market is hot right now, thus I'd be very cautious about leveraging up ... I would still do it if I found a great deal, it is just that great deals are more difficult to come by at the moment. Don't leverage up or sell/1031 for a mediocre deal.

Alim Abrahim · Answer

Many of my clients are selling SFR and smaller multifamily, duplexes, fourplexes, etc in California... and 1031 buying 12-30+ unit properties in Florida.  Though, it all comes down to your personal goals and strategy moving forward. Where do you want your real estate income to be 5 years... etc...

I know great lenders that could talk to you about the tipping point of whether to refi for equity, or sell to apply more buying power to get a higher leveraged income that you have with the current portfolio.

Feel free to call or email anytime - your strategy, and longer term goals should define your options, and quiet the distractions.

Thanks!

Scott Brady · Answer

The valuations of your SFRs may have peaked but there are many multi-unit (preferably in non-rent control areas) where rents are way below market because they were self-managed by the owner...we just closed on an 8-unit building in La Habra....current rents are $8,500 a month...paid $1.4mm...but will increase rents through our property management company to $10,00 over the next 18 months (rents were not raised in some cases for 10 years) and that will put us at $1.8mm or so using current GRMs and Caps...economies of scale and no one is building affordable rentals in SoCal right now so this product will endure.

Dylan Vargas · Answer

@Renny Fon Welcome! What kid of rent are you getting from your SFR that are paid off? What kind of shape are they in? What would they sell for? These answers would help give options as well as what others have said about risk tolerance and goals. If you are making $4500 per month just off those 3 rentals you are in a damn sweet place. One could argue why risk anything and keep doing what you are doing. If gutsy and want more money then yes, sell and find a bigger apartment community (or SFR in a cheaper town but good town) and collect more money per mont and/or equity over time. God spot to be in and congratulations to you!

Stephen Masek · Answer

The problem with using leverage is that the lever can pry for you or against you.

We're closing today on SFR number 15, all free and clear.  There is still appreciation to be had from SFRs.  There is also diversification of risk, since we have them in several states.

However, we have started to research apartments and see nothing attractive.  It seems that we should look for a neglected 20 to 30 unit building in an area where good rents can be had after renovation.

Prices in California are bizarre, with incomes not increasing, tenants packed in and taxes and regulations increasing.   My environmental consulting company just inspected a 21 unit building in  southern CA.  It has original 1960s kitchen and bathrooms, water piping ready (literally)to pop open in numerous places, dreary corridors and needs new electrical panels.  We'd guessed that it might be listed at $7,000,000 or so, then looked it up - $19,000,00, which is $904,762 per door!

Brian G. · Answer

@Renny Fon and @Andrew Campbell, I am in a similar boat to you. We've got a handful of pretty solid SFRs that have appreciated nicely through rehabbing and area appreciation, as well as flowing well, but we would like to move into larger properties and we're torn between keeping these assets or liquidating them to focus solely on larger properties.

The other posters have hit it on the head about figuring out your risk tolerance and the comfort in having free and clear properties over leveraging everything to jump into a riskier endeavor. You're in a really safe position right now and levering up to a large property might put a lot more stress on you, if the market falters, where your current portfolio should be able to weather the storm better. Secondly, would keeping the SFRs take too much of your time up with managing a larger property and perhaps burn you out? I think @Beka Shea hit it on the head: are you just looking to add doors/income streams and you're okay with the extra work, or would you like to focus more on economies of scale in a larger property?

Good luck!

Sell SFR and buy multi-family?

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