Multi family vs. Multiple single-family units

[Wendy Huang]

1) Is it true that to invest/buy a multi-unit apartment one would need minimum 20% down payment?
If that's true, isn't that only possible for big finance companies (not for individual W2 earners, despite solid income bracket)?

2) Also, I have only seen an Apartment complex sold as an entire triplex or 6-unit etc, and never as partial sale (i.e. selling only 2 units out of a 6-unit complex, for example) so it is WAY LESS liquid in case if investment goes poorly?

Also, these Apartment complexes take WAY LONGER to sell, based on the days theystay on realtor.com, Trulia etc

3) Even though it is more time consuming (lots of offering/loan/inspection/closing deals), wouldn't it be less risky/more liquid to buy 10 cash-generating single family units instead of buying one single 10-unit complex? This way, you can sell the home that is not generating positive cash flow?

[Russell Gronsky]

@Wendy Huang, I'll show a simple example that will hopefully show you why so many people prefer commercial multifamily over residential housing. Lets use your example of 10 SFRs vs a 10-unit apartment building.

Lets say your 10 SFRs are each worth 300k because all the nearby housing is worth that, so = $3M total. If you raise your rents $10 per month on each house, what will all your houses be worth? Depends on what the houses around them are worth. Even if you raise your rents $500 per month on each house, your properties will still only be worth what the houses around them are worth. Duplexes, tri-plexes and four-plexes are the same way.

The 10-unit apartment complex is worth....? Depends on how much NOI it produces and the CAP rate in the market. But here is where the cool part about commercial apartments comes into play:

Value = NOI/CAP rate

So, if the market CAP rate is 5%, which is true in many of the hot markets around the country today, that means for every $1 of increase to the NOI, the value goes up by $20!

So now just like you raised your rents $10 on each house, I raise rent by $10 on each apartment. But while your houses remained the same value, the value of my building just increased $24,000.

This is just 1 example of benefits. There are many, many more.

I hope this helps.

[Erik W.]

@Wendy Huang, hi and welcome to BP!

20% down payments can be created in many ways:

1) Seller financing

2) Hard Money

3) Joint partnerships

4) Syndication

5) Cross collateralization

The debate about the Pros and Cons of SFH vs. MF units is lengthy and you will learn many if not all of them searching older posts on this site. Liquidity is only one factor among dozens. To decide what works best for you, it comes down to one primary factor: what are your goals?

[Evan Polaski]

@Wendy Huang, to add on to what Erik mentions:
1) 20% tends to be the minimum down. More typical is 25-30% down depending on size. However, 4 family and under can qualify as FHA loans, if you plan to live there, with as little as 3.5% down.

2) yes, apartment complexes are all one property.  In theory, you could convert a duplex, triplex, etc into condos and be able to sell each individually. There is cost associated with this, and if you end up not being able to sell all of them you can get into weird financing issues to do a bulk sale, since you created many individual, legally separate properties.  I see multifamilies of all sizes go pending very quickly in my market, assuming they are well priced.  That is the same as a single family.  If you are asking $400k for a $200k house it will sit.  But in general, there are a lot more single family buyers than mulifamily buyers, but there are also a lot more single family homes then there are mulifamily, at least in my market.  So supply and demand ratios are still relatively consistent, and definitely supply constrained as of late.

3)Yes, in your viewpoint that is true. However that is not the whole picture. With 10 single families, you have to replace 10 roofs. With a 10 unit, you have 1 roof, and the cost is not 10x as much. Typically, a 10 unit building is going to sell for a far lower price per unit than 10 single families in the same neighborhood, granted rents in a SFH are typically higher than apartment complex, but in my experience it is not proportionate. Single family home prices swing a lot, and are entirely dependent on the market. While cap rates on a 10 unit is determined by the market, you won't frequently see quite as wide swings, and based on your NOI, that you have some level of control over. Then you have 10 loans and closing costs versus 1. 10 real estate tax bills versus 1, etc.

So overall, back to Erik's comment: your goals will determine what is best for you.  Many people here have had great success with single families.  Many have had success with larger properties.  Some have started in single families and moved up to larger.  And I am guessing there are a lot of people here that do both.

[Todd Dexheimer]

1. A triplex and 4 unit can be purchased with a smaller down payment, but an apartment building is going to require a minimum of 20%, plus closing expenses, due diligence fees, reserves, renovation budget and up front insurance and tax escrow. You however, usually will need 25-35% down payment. 

Many people are able to purchase 10-100 units on their own. This is usually done through trading up or refinancing, meaning they buy a 10 unit, then sell/refi and exchange into a 30 unit, then sell/refi and exchange into a 60 unit and so on. 

The other strategy is to find partners to invest with you via a joint venture or syndication model. In this case you bring some money to the table along with everyone else. That pool of money, then adds up to the down payment. 

2. The only way to sell a single unit is to convert to a condo. The investment is less liquid, however, there is still a very large market for apartment buildings. Apartments are sold on the financials, so it is less emotional, whereas single family is only sold on emotion. 

3. I would say the single family and multifamily have different risk. SF is more risky for cash flow due to scale. If you have a vacancy on a SF, then it's losing major money. If you have a big repair it can wipe out cash flow for years. With a 100 unit, we can typically have 20 units+ vacant and still be breaking even. Same with big expenses. 

MF is more risky if you are poor at managing the asset and it becomes distressed. In this case you will need to sell at a discount due to the poor cash flow. With SF if you are not cash flowing you can sell to the market and as long as the values are high, you'll be fine. 

[Andrew Hogan]

Great responses by all three guys here. I like where you're going Wendy but I don't believe that illiquidity and risk are 100% correlated. How have folks lost 30%+ of their stock portfolio this year if they could have sold the first day the market tanked?

Nobody knows the future just like nobody can eliminate risk entirely. It's all about mitigation of that risk.
Bigger IS Better in this industry :)

[Marlen Weber]

Loving this thread on all of the multifamily information and insights. Thanks everyone for sharing. 

[Chris Mason]

2. That's called a condo....

[Jaysen Medhurst]

@Wendy Huang, I won't repeat the very smart commentary your post has already elicited. One important thing to keep in mind, the market for residential (1-4 unit) and commercial (5+ units) have very little overlap. That's even more the case once you get to large complexes.

Case in point: You're observation that "these Apartment complexes take WAY LONGER to sell" is misdirected. There is no MLS for commercial properties. While some do end up on the normal MLS, the vast majority are sold directly between investors or through commercial brokers who market it through existing clients/other brokers. A 50-unit complex may be "on the market," but you'd never know about it unless you're hooked into those circles.

[Wendy Huang]

Thank you guys to all the great insight! 

Let's say IF you ARE in the "circle," what is the average time that a multi-unit property stays on the market? 

I know there are a lot of variables, but ball-park figure, that includes time spent on loan application, negotiation etc? 

[Alina Trigub]

Wendy,

You ask a lot of great questions. I think educating yourself on the topic of buying MFH will help you a lot. Start with the two of David Lindahl's book. 

Also, here's an article I wrote on cpmparing buying SFH vs MFH:

https://www.biggerpockets.com/member-blogs/10850/87253-should-i-scale-my-investment-from-single-family-homes-to-multifamily



Originally posted by @Wendy Huang:

Thank you guys to all the great insight! 

Let's say IF you ARE in the "circle," what is the average time that a multi-unit property stays on the market? 

I know there are a lot of variables, but ball-park figure, that includes time spent on loan application, negotiation etc? 

[Russell Gronsky]

@Wendy Huang, I'll show a simple example that will hopefully show you why so many people prefer commercial multifamily over residential housing. Lets use your example of 10 SFRs vs a 10-unit apartment building.

Lets say your 10 SFRs are each worth 300k because all the nearby housing is worth that, so = $3M total. If you raise your rents $10 per month on each house, what will all your houses be worth? Depends on what the houses around them are worth. Even if you raise your rents $500 per month on each house, your properties will still only be worth what the houses around them are worth. Duplexes, tri-plexes and four-plexes are the same way.

The 10-unit apartment complex is worth....? Depends on how much NOI it produces and the CAP rate in the market. But here is where the cool part about commercial apartments comes into play:

Value = NOI/CAP rate

So, if the market CAP rate is 5%, which is true in many of the hot markets around the country today, that means for every $1 of increase to the NOI, the value goes up by $20!

So now just like you raised your rents $10 on each house, I raise rent by $10 on each apartment. But while your houses remained the same value, the value of my building just increased $24,000.

This is just 1 example of benefits. There are many, many more.

I hope this helps.

[Joe S.]

Originally posted by @Erik W.:

@Wendy Huang, hi and welcome to BP!

20% down payments can be created in many ways:

1) Seller financing

2) Hard Money

3) Joint partnerships

4) Syndication

5) Cross collateralization

The debate about the Pros and Cons of SFH vs. MF units is lengthy and you will learn many if not all of them searching older posts on this site. Liquidity is only one factor among dozens. To decide what works best for you, it comes down to one primary factor: what are your goals?

I think it is more than ones goals. Most people can not meet the financial requirements for a multi family, but they can on a Single family.