Is Single Family or Multi Family a better investment?
Brad HammondBusiness Member
Real Estate Agent · Portland, OR · Member since 2016 · 1k+ posts · 605 votesHey y'all. I know there are a lot of other posts about MF vs SF on here but they are all slightly different. Here is my situation. I am in Portland, OR and am going to start purchasing more properties. I do have experience renting condos for the past 8 years. I have a full time job and am looking for a good long term investment. I would be looking to hold the properties for 5-8 years, sell and reinvest. I've got about $100k I can invest and am wondering if one 4-8 unit property would be better than 2-3 single family homes. What usually appreciates faster as well as has better cash flow? Any advice would be greatly appreciated and thanks for your time/expertise.
Hey Brad!
If you buy the multi-family at the right price, it will (should) cash flow better than a SFR. However, SFR's appreciate faster. Spread that across three separate properties and you will catch appreciation 3 times. If you go after the SFR's, you will be able to buy, fix, season, and pull your cash out for the next property. If you buy a 4plex, your cash will likely be tied up in it for quite a while, without a lot left to grab a SFR unless you can save quickly.
If I were you, I would go for the 3 SFR's and 1031 them in 3 to 5 years and roll into plexes later.
Hey Brad!
If you buy the multi-family at the right price, it will (should) cash flow better than a SFR. However, SFR's appreciate faster. Spread that across three separate properties and you will catch appreciation 3 times. If you go after the SFR's, you will be able to buy, fix, season, and pull your cash out for the next property. If you buy a 4plex, your cash will likely be tied up in it for quite a while, without a lot left to grab a SFR unless you can save quickly.
If I were you, I would go for the 3 SFR's and 1031 them in 3 to 5 years and roll into plexes later.
@Jude Hughes Great suggestion!
@Brad Hammond Appreciation is a great factor to consider. Commercial property 5 units and up is typically more difficult to sell with less favorable terms in regards to financing and ARM. If you have less than 10 mortgaged properties SFR are a great way to go. You can finance them with only 15% down for the first 6 mortgaged properties. versus the 25% down for a MFR. You will have to pay PMI if less than 20% down.
I just look for the best deal they are pretty hard to find these days especially in Portland so why limit yourself. One thing I would advise you after reading some of the posts please do not buy anything that does not cash flow Portland is above 2006 levels and income is way below 2006 they are also looking at rent control so you could be stuck not cash flowing for a long time.
Lots of great information, thank you. @Jude Hughes, I didn't realize appreciation would that much different, thank you.
@Jerry Padilla, great insight on financing, thanks.
@Jon Nelson I didn't think about rent control and I think that is a very real possibility in the next few years.
I'm a multi-family broker in Portland, so this will sound a bit biased... I say focus on multi-family. There is nothing indicating a slow down of people moving to Portland. And since nothing is being built in their price range to buy, they are willing to pay a lot more for their rent. The only issue I see is with how much money you have to invest.
$100k won't get you a 4plex in (or tri-plex for that matter, in fact we just sold a duplex for $690k) unless you are buying it owner occupied. 5 or more units will put you in to a commercial loan situation (which isn't bad, just different) and you'll be in the $600k range minimum. You won't be able to hit your DCR if you only had $100 down, which you'd need at least $150k for the down payment. This numbers are for the areas that I think have the greatest opportunity to appreciate. You can go to other areas just outside the core of PDX and get more property for your buck, but you will not see the same type of appreciation.
Also, remember that the value of multi-family is primarily based on the income that it produces versus the expenses to get there. So even if the "market" appreciation remains flat, but you can cut expenses (billing back for utilities instead of paying them your self) and move rents up slightly, you can add a lot of value to your property. Forced appreciation.
With SFR, you will always have more buyers if you are planning to sell it in a shorter time farme, but the downside is that all of your income is tied to one tenant. If they leave you high and dry, or worse just decide to stop paying and drag you through the courts, it can be months of you covering all of the costs. This just happened to a friend of mine. With a multi-family, you will have those other tenants covering their portion so the risk is spread out.
Just a follow up to Benjamin's outstanding analysis. There are some multi-family properties in Beaverton that you could get into. The city is dumping a lot of money into the Urban Renewal program, and some of the rougher areas are really coming along now. In 4 years, I have had rents in a 4-pleg go from $775 to $1225. In fact, I received 11 online leads just last night on a new listing at this price point.
@Brad Hammond I'm a fan of multi family for many reasons (please keep in mind my experience/context for my opinions, which is the inner Portland market). I've outlined a few below.
1) Forced appreciation. A $100 rent increase per unit, per month, for a 4plex, with a 5 cap equates to $96,000 in forced appreciation. That cannot be matched in the single family world. Period. It doesn't take much to increase rents $100 per unit. A $400 rent increase on a single family homes = really no change in value because single family homes are not valued by income.
2) As @Benjamin Ficker stated, having more than 1 tenant paying your bills is a good thing and reduces risk on the debt service portion of management.
3) In Portland, multi family is just as liquid as single family homes. This isn't the midwest. Multi family goes fast in our market place and the buyers are less emotional (and afraid) than owner occupant buyers.
4) MF properties are easier to finance than single family homes.
4a) I highly recommend you look to non conventional ways of funding your transactions. Big banks are good for 2 things...low rates and long fixed rate terms. Other than that they're a pain. Basing your investment strategy on bank financing parameters will drive you crazy, limit your ability to grow and will keep you from being as productive as you could be.
5) MF provides better cash flow and allows for more efficient management.
6) $/Unit decreases as your "# of units per property" increases, typically.
7) Leverage. I want a property that can pay for a high amount of debt service. Amortization is one of the best benefits from real estate. More leverage = more debt that you are not paying off. More tenants, paying of more mortgage debt will result in higher net worth (and higher cash flow) in the end. Also, multi family properties create more leverageable equity, especially with forced appreciation, which will help grow your portfolio over time. If you're limited to 4 or 10 (depending on your financials and lender) conventional loans, and you're going the conventional loan route, I would focus on getting as many of those loans on multi unit buildings as possible, for all the reasons stated above.
Really though, it comes down to what you want to do. You can do well, or not so well, in both SFR and MF.
I can't disagree with anything stated above, but I have primarily targeted MFR so far, for most of the reasons Mike and Ben mentioned. But it's all about what's available, and what your exit strategy is. I always suggest having more than 1 exit strategy so that you can adjust when needed.
I've yet to sell a property, but have three 3-plex buildings that have all been providing both great cash flow, and excellent appreciation through rent increases. But I also have a SFR that was purchased because it was a better deal than anything on the market at the time. I may do better on that home than the MFRs, in a shorter timeframe. But, I have spread my risk with MFRs, while having a larger amount of equity buildup paid off by the tenants.
It's all in the deal you find. And I've found that realtors aren't all equal in their knowledge of investment real estate and strategy. Find a great one and they can bring you some good deals that others may miss.