Rent homes vs. building an apartment complex

Erik Hatch

Rental Property Investor · USA · Member since 2018 · 325 posts · 222 votes

6y

@Greg Dickerson

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Greg Dickerson

Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes

6y

Originally posted by @Tiffany Elli:

I grew up flipping homes and loved it but am looking for a steadier income and good long term investment. Haven’t been in (active) real estate in 10 years.

About to start a feasibility study and comparison. We will either buy multiple homes to rent out or build an apartment complex.

We currently have a 5 acre property with an 10k square foot building that can be gutted and resurfaced for a club house for an apartment complex.

Have appx. 700k cash. Have a great relationship with our banks.

For those that have had rent homes and apartment complexes- what are the pros and cons? We would build the nicest apartment complex in our area and probably start at 20-40 units. With plans to do another 20 units in 1-2 years. We can buy houses for a little cheaper than per unit cost, expecting to spend around 70k per unit. We can buy houses (built in 50’s-60’s, around 1500 sq ft) that need complete renos for $35-60. It seems as tho we could get the same amount per house or apartment per month.

We are leaning more towards building a complex and using higher end building materials. Like I said, this is our beginning stage. Just want to hear any advice from people with experience and if they had better luck one way or another.

Multifamily have several advantages over single family in terms of scale, efficiency, management etc. It really comes down to the numbers and your goals. Can you build the apartments and generate a better cashflow and higher value than would be created with single family at the same price or lower? Inventory and availability of properties can be a factor as well.

One thing to consider is keeping the existing building for amenities. Depending on the site, the area and the demand it may be more beneficial to tear it down as to maximize the site and number of units. Not all properties need a clubhouse and infect many are eliminating that type of space especially in smaller properties like this and properties that are more urban.

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Evan Polaski

Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes

6y

@Tiffany Elli, @Greg Dickerson is definitely your go to, particularly on development.

As with any deal, you need to go into with your exit in mind first. Will you be able to sell 60+ units in this market? While both single family and multifamily have price fluctuations, generally single family prices seem to swing more wildly. Additionally, there is a known market for apartment complexes. There is a market for owner occupied single family homes. But is there a market for large scale single family rentals? There might be, I just don't know.

Then you get to the scale, costs, efficiency. The simplest example I can think of is a roof. As a landlord, you are responsible. A typical roof will last 25 years. And last quote I got for a fairly basic one was $5,000 for a tear off on a single family. You have one tenant paying that amount. But if you build a 4 unit building, the cost may double, but the price per unit is 50% of the single family cost. Make that a 10 unit building, and same effect. Now you might have to pay 20k for the roof, but your cost per unit is 40% of single family. The same can be said with parking lots and any common areas.

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Ryan Daigle

Investor · Apex, NC · Member since 2018 · 253 posts · 215 votes

6y

@Tiffany Elli make sure you account for more than just the financial aspects of the comparison. Think about the administrative complexity and time overhead associated with a portfolio of SFHs vs. a single MFH. If the returns are within a few percentage points but one is going to take a lot more of your time then you should be sure to account for that cost.

Another thing to factor in is the predictability of your projections. SFHs fluctuate much more since their value is based on personal whims of local buyers. MFHs offer a much more deterministic formula for value which is more in your control. There's great value to that predictability.

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Jacob Blackett

Specialist · Columbus, OH · Member since 2012 · 176 posts · 98 votes

6y

Originally posted by @Tiffany Elli:

I grew up flipping homes and loved it but am looking for a steadier income and good long term investment. Haven’t been in (active) real estate in 10 years.

About to start a feasibility study and comparison. We will either buy multiple homes to rent out or build an apartment complex.

We currently have a 5 acre property with an 10k square foot building that can be gutted and resurfaced for a club house for an apartment complex.

Have appx. 700k cash. Have a great relationship with our banks.

For those that have had rent homes and apartment complexes- what are the pros and cons? We would build the nicest apartment complex in our area and probably start at 20-40 units. With plans to do another 20 units in 1-2 years. We can buy houses for a little cheaper than per unit cost, expecting to spend around 70k per unit. We can buy houses (built in 50’s-60’s, around 1500 sq ft) that need complete renos for $35-60. It seems as tho we could get the same amount per house or apartment per month.

We are leaning more towards building a complex and using higher end building materials. Like I said, this is our beginning stage. Just want to hear any advice from people with experience and if they had better luck one way or another.

I'd check feasibility of building homes on the lot vs. apartment complex and also considering buying already built up multifamily. From my experience MF is much better for cash flow. Better loan terms and economies of scale that SF homes will always lack. I used to own about 150 SF rentals - I have sold about half of them, and continue to sell the rest. They will work out to good investments but compared to my MF holdings (about 1,100 units), they are incredibly more hands on and time intensive, and don't cash flow as well. (exception being my A class SF homes > those do really well as long as you have a good basis i.e. buy them at the right price and with low leverage, which can be extremely difficult)

Good luck!

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James Hamling

Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes

6y

@Tiffany Elli I notice and am focused on your statement that the MFH you would build would be the absolute best in the market area, I strongly warn against that in this economic cycle.

I am speaking specifically to economics, more specifically macroeconomics. The area we are economically entering right now, or at least the majority of consensus states, as it speaks to rentals is one of COMPRESSION. What this means is picture all rental class's on a verticle chart, A+ on top going on down to D-, and on the side is another chart that lists $'s as market rent rates. Now picture placing a vice on those property class's and squueeeeezzzzzzzeeeeeee, that is whats forecasted with highest probability at this time.

What that says is those with A class properties, the best in a market, they are most likely to potentially suffer declining revenues. And interestingly enough, those in the lowest strata, have a good likely hood of increasing revenues. And those somewhere in the middle, C+ to B-, net 0. This is due to the very unique combination of economic factors at play here, namely housing shortage.

Point is, I would definitely NOT want to have the absolute top of market property at this time and most especially not go into building and development of such at this time what so ever and I imagine commercial financing pro's in this arena would caution the same. As a side note this is an area where working with small local banks can be a negative as they may not have that depth of knowledge a larger national commercial lender who specializes in such development can bring to the table.

If anything I would absolutely work in developing at the top tier of affordable housing, as that has highest growth prospects. Personally I am a huge fam of townhome development, it gets top tier tenants and revenues in the MFH arena generally speaking, with good vacancy #'s and so on, again that's myself personally.

If I had 700K liquid to invest at this time, I think I would be looking a lot more at portfolio acquisitions than development, again at this time in market cycle. I would focus on leveraged commercial financing for such, and acquisition for equitable gains, be it re-classing a community or mismanaged portfolio, the easier re-development type vs development.

Hey, either way, 700K liquid is a great position, kudos getting there.

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Rent homes vs. building an apartment complex

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