If it's not development/multi family does it even make sense?

Question

I'm starting to wonder if if really makes sense (in the real estate investing world) to do anything other than development/multi family as far as a long term hold investment.

SFH - the returns aren't there to justify the time/opportunity cost in my opinion. Best case scenario you get a mediocre equity capture at the buy. I'm not sure if a little residual cashflow, depreciation and appreciation is worth it. Maybe this is somewhat location based. Expenses have gone through the roof the past few years - labor and materials. Rehabs are more difficult. Repairs and maintenance eat up the vast majority of the cashflow. You're left with deprecation - which seems to only be a benefit if you're an REP or stay in real estate indefinitely. And what would the end goal be - likely consolidate into Multi-family or develop your own residential community (so multifamily in a sense). So you come full circle in the end.

Flipping - this is a business, not investing - in my opinion

Lending - another business

Wholesaling - another business

Multifamily - makes sense due to rent/price ratio. You can actually cashflow these since the rent to price ratio is better. Trailer park works. Manufactured homes etc. A plot of land with scale of housing.

Property Management - another business. This is actually a good one. Low overhead and constant cashflow.

I've been debating for a while on diving further into RE by making it a full fledged business or going a different route. And I keep coming to the conclusion of going a different route - running an actual business. You still get tax deductions, the cashflow is likely higher (since that is the goal of a business), you can still buy/hold land or develop it. I actually took the last couple of years off from real estate investing - and I think it was a great decision.

I keep looking at my brokerage account over the past several years and wishing I had invested most of those down payments in the market. I mean we have been on an absolute run the last several years. I personally don't think it's going to slow down either - interest rates are coming down more this year and into next - especially when Powell is done. The currency will be devalued and stocks, I believe, will go through the roof. And how long is the average bear market - less than a year. Great time to stockpile cash and DCA on the way down and on the way up. I would literally have hundreds of thousands more if I invested those down payments in the market.

I think I'm over real estate investing in the traditional sense - why go to the courthouse steps or cold call and make tons of offers, take tons of time lining up contractors/subs, check their work, get pissed at them, get the project done, then hand it over to a property manager. Collect minimal cashflow after repairs/maintenance for what - 15% equity capture and breaking even on cashflow? Then wait years for appreciation to have an effect - so you have a minimum hold of really 10 years. This is slow, lots of work and gets average returns. Sure some do better, and I can guarantee a lot do worse.

Am just being critical or does this make some kind of sense?

Stuart Udis · Answer

It varies. The prize for rental SFH's has always and will continue to be appreciation. With elevated interest costs, insurance and construction/ other misc. opex, it's become more difficult to sustain these SFH's long enough to enjoy the appreciation. Look at the trends of many of the national builders....higher end homes. This is because lumber, rough mechanicals, site work costs don't vary much whether its entry level or higher end housing besides likely using engineered instead of dimensional lumber assuming larger homes with wider spans.

More to your point about building multi-family, in Philadelphia I am finding it more and more challenging to build multi-family housing. I believe the efficiencies are being overtaken by new costs. I am sure many other cities are experiencing the same building code introductions between fire rating and STC assemblies, sprinkler system types, increased costs of mechanical equipment, namely HVAC equipment. With these added cost figures the numbers are getting tighter.  Many of these costs don't apply to SFH' and suspect that along with the well-defined buyer pool is why SFH development is still desired by many.

Gregory Schwartz · Answer

@Jeremy Horton What is the goal? What do you consider a long-term hold investment? Over a 20-30 year time horizon low-risk portfolio of single-family and small multifamily grown consistently with safe levels of debt can be one of the lowest risk ways to grow wealth. You likely won't experience any crashes. You can be active during the years that you have free time (sourcing off-market deals and doing bigger renovations) or more passive when life gets hectic.I'm convinced there is no better "get rich almost guaranteed" investing method out there.

Ryan Arth · Answer

@Jeremy Horton You do have a solid argument. Where it gets really gray is when you look at the fact that to keep up with the historical S&P average, for example, you need to leverage buy and hold real estate to keep up. As someone once said, the building owner should never produce greater returns (unlevered) by owning the building than the company that operates out of that building does. It wouldn't work long term.

I still think that SFRs make sense for the beginning investor, as they may not have invested with the same diligence over time into the market, etc. If they were a diligent investor and are simply comparing investment options, then your argument is absolutely worth entertaining. A straight LTR isn't very exciting from a return perspective, especially if it isn't levered. There are other strategies to improve the returns, but again to your point, that is moving more towards it being more of a business.

As Jay Hinrichs has said, he only sees real wealth creation and cashflow (at the level he considers impressive) from SFRs when you own 150 or so doors. Everyone will have their own threshold where they would be satisfied though.

I am with you though, we sold all of our SFR. We are building and developing, started a construction company, and have been casually looking at companies that are for sale, adjacent to the industry. All more "business" than investing. The closest active thing we are doing to straight "investing" is looking for value add MF, which again is more active.

It all comes down to investor preferences, their goals, their available capital, etc. If you were only solving for maximum return in a given timeframe there would be a more defined answer.

Jason Wray · Answer

Jeremy,

You know the saying "to Each their own" and every investor or home owner will have a profit or loss history to tell.  I have been in the REI and Mortgage Banking for over twenty years and I have heard mostly everything.  One thing for certain is I have seen more people change their lives and make more money than they thought possible by buying real estate.

Biggest factors for the inventors that made it possible to earn more money came down to things like "Location, Networking (to build a team), using the best finance program (use the bank's money) (Less money down or out of pocket) to stay cash fluid, choose a home that offers cash flow and a quicker ARV be it walk in equity or quicker due to minimal renovations.

I have investor's in states like Indiana, Ohio, FL, TN, GA and a few others that can buy a duplex for under $180K and refinance in 6 months after minimal renovations ($15K to $30K) and it appraises for 300K+.  These are home that are not "subject to" with no issues on inspection or appraisal.  I think it comes down to location in general and knowing or having a seasoned team.  I would not give up just yet mortgage rates are going to be dropping down quickly in the net 3-6 months!  That will help cash flow and make it easier to buy more REI!

Jeremy Horton · Answer

The goal would be beating the "average" return - so 10%. I can invest in the S&P and make 10%, on average with zero work. I'd consider it low risk over the long term. HYSAs are paying ~4% with zero risk. So I think the 15-20% range for real estate would make sense considering the risk and time involved. Long term I would say 10+ years.

Small MFH I would agree with - the rent to price ratio seems to be higher, less risk than a SFH in terms of vacancy etc. I almost feel like this is the only way to go in terms of returns. Why MFH? It's the scale, the rent:price ratio, cashflow to sustain the business, less vacancy

At our level I doubt any crashes would significantly effect us - I think the affordable rental market will always have demand. So low risk there, I agree.

What I'm not sure about is the "get rich almost guaranteed" - I think it depends a lot on timing or location. If you don't have either of those, it's a long slow road ahead with a SFH. I think the S&P outperforms those that don't have something extraordinary about their SFH

Jeremy Horton · Answer

Location is definitely a key - I would generally consider ending up with the "right" location as timing, duration of ownership and some "luck".

Timing would refer to a period - say prior to 2020. You could've bought something in a good location, held it for a year or so and made 50%. I watched this happen with a bunch of STRs especially - Florida, Tennessee etc. I would not say this is luck because it would be hard, if not impossible, to consistently repeat.

Networking I understand - but your lender is only to get you so good of a rate, your GC is only going to work for so much etc. I've had good people come and go - for me you either need to scale to hire a project manager or be in the real estate business where you can constantly supervise work. It's been a sticking point of mine. I did the DIY - too time consuming. I did the GC (used my property manager as a GC), stuff just not done like it should be. I really admire people who can get past this point - especially hiring others in their business.

Those locations you mentioned are wild - I mean you're all in for what 60-70% ARV. That's insane. Almost too good to be true.

My location isn't like that - insurance up 50% in the past 3 years, property taxes increased etc. Problem is - rent hasn't remotely kept up with the increase in expenses. My properties still cashflow, it's the opportunity cost that gets me. Other investments I feel like may just outperform real estate

Thanks for the positive reply!

If it's not development/multi family does it even make sense?

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