Invest in multi family for cash flow vs SFR for appreciation
Irvine, CA · Member since 2016 · 243 posts · 59 votes
Hi Everyone,
I am a beginner investor looking to buy 3-4 properties by the end of the year. I have been looking at different properties and I wanted to get the opinions of some more experienced investors on here about the better route between investing in SFR or multi family i.e. duplex, triplex, quad.
I am kind of tossing up the pros and cons between the two and I am still unsure which way I should go.
With SFR I like the fact that they are more likely to appreciate in value over the long term but do not have as much cash flow while the multis have significantly more cash flow but will no doubt not appreciate in value as much as the SFR.
I am planning to hold these properties for quite a long time 10+ but at the same time I want to have an exit strategy if I need the funds for another investment or something unforeseen in the mean time.
Any advice/guidance/suggestions would be greatly appreciated.
Thanks so much for your time.
David
@David Rutledge, cashflow is created by buying right. Both property types can cashflow big time and both can suck your savings dry.
Many see multi-family as easier to manage - one roof instead of 20, etc. In either case, I am always trying to improve my property to generate the most cash flow while still maintaining an awesome ROI.
I don't worry about appreciation too much. My plan is to hold onto the properties for a very long time and then sell them with owner financing. And when I sell, I will create the value through the financing, independent of a property's appreciation.
For your "I need an exit strategy if I need funds" requirement. We are currently looking at getting a commercial loan for our properties. While the amortization period changes from 30 years to 20, the lower interest rates support the higher payments and we still increase our cash flow.
It also frees up all that underlying private lender financing we currently have allowing us to use that to buy more off line distressed properties. None of our lenders have indicated that want their funds back; they enjoy the returns and the consistent payments. Again, this solution is not dependent upon market appreciation. We forced appreciation by buying them at a steep discount and then completely rehabbing them.
These strategies work for multi-family and SFRs.
The one thing I don't like about multi-family is the extreme difficulty managing pests. That won't stop me from buying them but I really hate that aspect.
Many site the advantages of multi-family is that if my 20 unit has two vacancies, I still get 90% of my rental income. If my house is vacant, I get 0% of my rental income. I really don't like this analogy as I think it's apples and oranges. If I have 20 properties and two are vacant, I still receive 90% of my total rental income.
Gerald Demers
Thanks so much for the reply and the input Gerald, it all makes a ton of sense. I am starting to lean towards multis. Not 20 units like you just yet but 2, 3 or 4.
Thanks again for your insight.
David
I'm constantly doing something at my multi's, whereas I only go to the singles if there is an issue. The singles are easier to manage, the tenants are not calling complaining about the upstairs neighbor, etc. The singles have less maintenance costs as you can have the tenant be responsible for lawn care, etc. The multi's do provide more cash flow per bedroom though in my experience. I like owning a few of each. If you have the time, go for the multi, see how it goes, then next year maybe go for a single
As far as appreciation goes, don't count on it. Obviously, right now we are in a good up market, but that doesn't mean the next 10 years won't see stagnation. Buy because its a good investment, not because of what the value could be (a guess) in 10 years.
Both my single's and multi's have seen rising value lately, pretty even %'s too.
Great advice, thanks David!
David
I have pretty much been teaching this to my students for the last 35 years. Look for them in older parts of town, not slums or suburbs. Note banks will not finance ugly properties over 4 units, therefore 85% of the time the investor that is selling will take back the financing.
Multiple oddball configurations are the kind of properties that I preach about because they offer a wide range of opportunities. These are mostly older non-conforming type real estate. For example; "cluster houses" like my Haywood and Cherry Creek properties. I call them "challenged properties", meaning most investors don't want to touch them. I own many properties with various building combinations such as a three-unit apartment building, surrounded by 4 cottages and a duplex. My Oregon Street property was an older 4 bedroom family house and a large 2-story duplex with a garage. The property was easy to convert to 5 rental units by making the garage into a 1 bedroom apartment and splitting off a bedroom and bath from the 4-bedroom house. A rear door entrance made the house conversion fairly inexpensive and of course created 5 separate rental units and of course more income.
Obviously, my basic idea was to purchase three rental units at the regular 3-unit price, knowing all along I would be able to modify them and quickly start earning 5 units worth of income. Oregon Street was an extra special money-maker because the property was rundown and rents were abnormally low when I acquired it. With the conversion to 5 units plus my fix-up work, I was able to increase rents from $1000 monthly to $1900. The total job took me just over a year to complete. A short time later I sold the property for more than double the price I had paid.
From an income standpoint, which I care most about; oddball units command the same rents as newer apartments, sometimes more because they generally offer more privacy. Another very important common attraction is that older challenged units have long been paid for! They have no bank mortgage to mess with. More often than not owners can finance the sale. That means no credit applications, tax forms, loan fees, appraisals and variable rate bank loans. In summary, lower purchase prices, less competition and long-term owner financing are commonplace with these types of properties. If cash flow turns you on, my advice is start looking for my kind of "challenged" properties today.
Thanks Jay,
Definitely some really helpful advice and without a doubt something I will look into.
Thanks again for your time.
David