Single Family vs BRRR vs Multifamily?

Question

I still feel pretty new to this real estate investing thing, so I am having trouble comparing options.  My past experience includes two town homes that were more or less move-in ready, three single-family homes that needed quite a bit of work, and one single-family home that was move-in ready.  My current portfolio includes three single-family homes (two in Marietta, GA and one in Charleston, SC) and one town home in Kennesaw, GA.

For my next deal I was planning to look for another single-family home (in Charleston) needing only minimal cosmetic work, but then my brain started churning.  I have saved about $30-40k for the next property intending to put 20% down on a $150k property.  Instead, I could look for a ~$20k property, fix it up, refinance, and do it again.  Another option would be to sell one or two of the single-family properties in Marietta (they are paid off and each should sell for between $60-70k) to create a down-payment for a fourplex in Charleston.  How do I begin to compare the pros/cons/returns/hassle of such different alternatives?

JD Martin · Answer

Another option is to just cash out one/both of the Marietta houses rather than sell them outright, assuming they have strong cash flow already.

There's no right answer to any of this. How many properties do you want to own? Do you want to own MFH? It has its own opportunities and problems compared to SFH. Many people "graduate" to MFH, but some (like me) stick with SFH if it makes better sense in your particular market. Do you care if everything is financed, or do you feel better owning some properties outright?

My personal preference for a portfolio is a mix of refi'd and free & clear properties with a strong cash position. That's more conservative than a lot of people, and I agree that dead equity is money not working for you, but I'm comfortable with my strategy and it has been successful for me. Most of the MFH near me that's not old, divided homes (of which I have no interest, as these are usually serious money pits for maintenance & capex), are large apartment complexes owned by corporate entities, and competing against them is difficult when they can routinely offer things like "First month free!" or "$99 security deposit". There's an economy of scale there that's difficult to compete with, whereas we have a very strong position with SFHs in my market that makes it harder for others to compete with us.

David Thompson · Answer

Certainly knowing your local market and your investment experience / preference is utmost important.  If you are seeing a better performance and opportunity gap w/SFRs vs fourplexes, then stay that route.  My experience is different in the markets that I work for small MF and would say most folks I talk to on this subject agree.  Yields are higher and provide more cash flow per dollar spent.  Alternatively, you could continue to acquire SFRs based on your bread n butter play while you educate yourself on small apts in your area.  Get some education and read up, listen to podcasts (Brandon Turner loves small MF) and has some good podcasts that explain why, citing is 20 unit as his best acquisition to date.  Look at the numbers on something larger and see how that comes out.  You could trade up your SFRs over time w/a 1031 exchange selling your portfolio to another investor and trading up as an alternate way to reach your cash flow goals faster.

Troy Gandee · Answer

@David Lowe BRRRing those cheaper properties is definitely the fastest way to build your portfolio and you can force cash flow on those properties as long as you don't over-rehab. However, it's a lot more difficult than expected to find deals around here that are at a deep enough discount to refinance and have $0 out of pocket costs. You can find properties for quite cheap, but they usually require extensive renovations when they're that far below market value. It's been my experience that most people still have to bring forward a little bit of money to fill in the 20-25%. The other problem is that most lenders will not lend on properties valued less than 75k. The lowest I've ever seen is 60k, so those cheap properties can essentially be un-mortgageable. Another consideration with those cheaper properties is your quality of tenants. My rentals are in a C-D class neighborhood. I started there because I had very little cash. I've been lucky with my tenants, but those areas can demand much more maintenance and management.

David Lowe · Answer

@Jd Martin Thanks for the feedback.  Cashing out doesn't work in my particular case because the houses are in a flood zone.  The houses themselves sit high enough that there is little risk of them flooding, plus they're from 1950 and have no evidence of flood damage.  A refinance would force me to get flood insurance which would eat away at quite a bit of my profit, otherwise that is exactly what I would do.

I don't mind mixing refi-d and free and clear properties eventually, but right now interest rates are so low I really want to take advantage of that.  I'm not looking to build a house of cards, but I can still qualify for traditional mortgages so that seems like the way to go for me.

I always assumed I would buy several SF houses, hold them for a while, and eventually sell some to upgrade to MF.  I don't have a goal for a specific number of doors; I am mostly focused on cash flow at the moment.

@Jonathan Tremblay They are technically 2-1, but there is also an office that my tenants have used as a bedroom (the office doesn't have a closet and doesn't have room to add one).  They are approximately 1,100 sqft.  One is rented for $700 and one for $750.  One house had tenants when we purchased it and they have been great.  They take good care of the and have very few maintenance requests.  The other one took about a month to find a good tenant, but they have also been very low-maintenance.

I've never used the site before, but I just looked on www.rentometer.com and it looks like my rents should be a bit higher.  The properties are located between Atlanta Road and S. Cobb Drive, north of Windy Hill.  What rents have you been seeing in that area?

Lane Kawaoka · Answer

Ibraheem D.

If you have the seed money jump right into large deals. Like in the Cashflow Game. Stop screwing around with the small deals and go for the big stuff. You have to team up with others and find them though... but that hard and a lot of people won't do that.

Troy Gandee · Answer

@David Lowe It just depends on the lender. Most of them don't like to lend less that 40 at the lowest just because they won't make much money. The lowest I was able to find around here was an appraised value of 60k minimum, which meant they would lend 45k at 75% LTV.

John Colburn · Answer

The advantages of a SFR is they are normally much easier to sell, and you will have a better quality tenant.   I would much rather have a SFR that cost $70k than pay $100k per unit for an apartment.

I cannot understand why MFR's have become so popular within the last year.  Two years ago with much better cap rates MFR's were hard to sale.   I would not be surprised to see MFR values drop in the next few years.  I think many people are entering the market  (no where else to go) and are happy with 5% to 6% returns.   If interest rates rise a couple of points you will see people exit the market,  and with many of them having commercial loans that renew every few years it will be very easy for them to be upside down.

That said I do like MFR's for the right price.  I recently sold a 6 unit for 50% more than I purchased four years earlier.   I would have never sold the building but the offer was to good to pass up.

Hope this helps.

David Lowe · Answer

@David Thompson My main goal is cash flow (to eventually replace my income from my job).  My goal is to replace my income within 5-10 years and I feel like I'm off to a pretty good start with the four SFRs I already have.  I do agree that the SFR route has been slow and requires quite a bit of savings, but I feel like multifamily requires MORE savings.  The numbers I have been seeing are SFR are just under the 1% "rule" (I know there is more to analyze, this is just for discussion purposes) for properties between $100k and $200k.  There are a few four-plexes available in my area for ~$400k that rent for between $750-850 per unit.  The cash-on-cash return appears to be better for the SFRs in this case, but I always hear people talking about great cash flow from MF.  What am I missing something?

@Troy Gandee I'm not opposed to bringing money to the table (although it is nice to refi and get my money back out when I'm done).  The last time I was looking against properties and ran against a minimum load requirement, the minimum was $40k, but that was in Georgia.  Is the 75k thing a South Carolina (or Charleston) thing, or have regulations really tightened up that much in the last two years?  Thanks for the advice.

Single Family vs BRRR vs Multifamily?

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