SFR vs multi tenant

[Deion Alaei]

Hi BP,

I wanted to get some opinions from other bigger pockets members.

When it comes to deciding on a type of property to acquire/invest in,

how do you feel about investing in SFR package deals as opposed to multi tenant properties such as apartment buildings, shopping centers, etc.

The reason I ask is because when it came to which was a safer investment, I've always thought of multi tenant properties as better acquisitions because having multiple tenants is obviously better than being dependant on one tenant.

If god forbid the one tenant decides to take off, bam there goes your income. That's why I wanted to get your opinions - if you had the option of getting a 10 SFR package or 1 multi tenant property - which would you choose/prefer - or does it even really make a difference at the end of the day - because of the safety net of having multiple tenants.

I welcome and appreciate any responses/opinions.

Thanks BP

[Bryan L.]

Here's my real life example to consider. I bought several houses before I bought my first multi. And that multi is eating me alive. And I can't give it away. Here's the big danger with multis - your only potential buyer if you need to sell is other investors. And they will be buying based on your financials. And if you made a mistake or bought it too high or the market changed or whatever, and you're losing your arse on it, then why in the hell will somebody else want to take it off your hands?

On the other hand, most SFRs can be sold to a home-owner who won't be concerned about past rental performance.

Take a look at some numbers as an example. Let's say that you have a multi that you buy with expectations of the market rents to be $40,000. Assuming the 50% rule (NOI is 20,000) and a 10% cap rate, that values this property at $200,000. Now let's say that you made some mistakes in your analysis and/or the market changed, and your actual gross rents are 10% less at $36,000. Combine this with a higher than expected vacancy rate due to the soft market, higher expenses since you have to keep paying utilities in the empty units to keep the pipes from freezing and busting, and your NOI is now $15,000. Damn, you just lost $50,000 off the value which puts your current value at 150k instead of the 200k that you paid. But alas there is hope since you put 20% down, you will only have to bring 30k to the table to sell this beast.

Of course, you may not make any mistakes and your market may not soften, but this scenario that I painted above is a very possible reality with multis. Ask me how I know.