Talk me into Multifamily?

Question

I bought ten SFH back in 2011-12, lucky timing for me. I stopped buying when the market improved (big mistake) thinking I would wait for the next downturn - and I've been waiting ever since. Now I have finally slowed down from my real job and have been saving my money so I am working hard to acquire more properties. I have had a great experience with my SFH, great renters, always 2yr leases and very low turnover and minimal calls. That said I keep hearing and seeing everyone say that once you get to 10 houses should definitely move toward multifamily for higher returns. My concern is that I will have much more work from shorter leases, more turnover, conflict with tenants in the same location and potentially more calls from tenants. I really want to give it a try, but just not seeing it so far. Let me know your thoughts! Thx Jim

Bjorn Ahlblad · Answer

@Jim Glover people make and lose money in every segment of REI you could mention. You have found success with the SFR so what's wrong with that. Typically SFR is easier to sell, gets more market appreciation, and lower cash flow. Look at your goals and why you are doing REI.

You can't match the per door price of MF, nor the economy of scale, and if you are able to re-position the asset you can enjoy forced appreciation which can kick in faster than market growth would, and you have better cash flow along the way.

Today the barriers to entry are higher with MF over 5 units; higher DP, higher reserves, net worth requirement, more expensive money all tilt the equation and raise the bar for entry into MF. Take it all in, evaluate, and then decide for yourself.

Adriel Hsu · Answer

@Jim Glover if what you're doing works, no need to change, unless you want to massively scale up.  Single family returns can be greater, just harder to scale. You can have 500 doors in 2-4 properties with larger multifamily vs finding and closing and operating 500 single family homes.Larger Multifamily (Loan amount over $1,000,000) have much better terms/rates than single family loans (non-recourse and interest only etc). Cost segregation + bonus depreciation is probably the biggest tax advantage with larger multifamily over single family homes.  Allows for large paper losses in year 1 to offset other types of income if you or your spouse is designated as a QRP

John Casmon · Answer

@Jim Glover most people look to multifamily because they are looking to solve a pain point. If SFR is going great for you, I say stick with it. Most people like the scalability of multifamily, the different financing options, tax benefits, and the ability to pool resources together. Others like to invest passively in multifamily and focus on their own SFR portfolio so they get the best of both worlds.

Charles Seaman · Answer

@Jim Glover Different investors prefer different investment vehicles.  Both can be good investments depending on what you're hoping to get out of them.  Many investors likely make better returns on single-family homes, but multifamily provides easier scalability and also makes it easier for you to afford professional property management without taking as big of a chunk from your profits.  In terms of management, you'll likely find multifamily easier because at least all of your tenants are in one location rather than having multiple houses that are located in different parts of town.

Bryan Mitchell · Answer

@Jim Glover, yes, I have an interesting property in Alabama that’s 2.7 acres with 5 SFH on it. This Is a blend of MF and SF. Plus I have another lot I could put a trailer or manufactured home on. There are packages of duplexes on the market. I have seen 2 and 3 duplexes side by side for sale in the last three months. So, it’s not always either single-family or multifamily, sometimes it’s a blend.

Mayer M. · Answer

@Charles Seaman

Don’t forget better tax benefits such as accelerated depreciation

Pat L. · Answer

It's a whole new world compared to SFR. There are so many issues but adequate off-street Parking is one of the biggest problems we have found. The smaller the unit the faster the turn over & if it needs updating your better class of tenant will also get tired of it fast. Inheriting the sellers choice of tenants is another realm of ongoing conflict.

My contrarian strategy of 20+ years was to pick up 2-4units cheap, (foreclosure/tax lien auction), spend nothing on them & flip them contract for deed (2-3x my initial cost), then hold them for 5-10 years @>12%.

Many are still paying very nicely, & we are arms length from any & all inmate tenant drama. In fact I ran into one of our CFD clients at HD yesterday that has (with his sons) 9 of these properties that we still hold for him. He told me he has only one bad tenant, but he was buying roofing tile, Facia & soffit to repair one while it was 90 deg F outside!!!

Good luck it's a fun $$$ ride!!

Ellie Perlman · Answer

@Jim Glover - multifamily and single family are two VERY different asset classes. I started with (large) multifamily deals and completely "skipped" single family homes. It didn't scale, too much work for 1 door, when you can buy 30 doors much faster than 30 individual homes. Limiting believes was never part of my life, and going with multifamily was one of the best investment decisions I've ever made.

Jordan Atkin · Answer

@Jim Glover I don't think there is a right or wrong asset class. There are pro's and con's to each. My experience has shown that returns on SF are stronger than MF on an initial cash on cash basis. I think you can create better deals working in the "residential" space, I have found that as the deals get bigger the other parties in the transaction are typically more sophisticated. Not always but generally.

What I like about commercial and 5+ MF is that when you increase the NOI it makes a direct impact on the property value. Not so much with SF. If you have a lot of experience and comfort in SF, feel content staying there.