With present market conditions how do investors determine to buy sfrs or multi family?

Question

It seems like the hedge funds are focusing on sfrs in the hopes they can get good rental income and wait for the homes to appreciate.  Is focusing on sfrs the best strategy under current market conditions?  What would be the pros and cons of buying sfrs  vs multi family?  SFRS seem appealing for the rent and chance for appreciation but wouldn't it be easier to leverage your money in a multi family deal?  For example, if you had 70k cash you might be able to buy 1 sfr all cash but if you use leverage that same 70k could buy you a 350k multi family property (20% down).  I heard someone say that banks don't like to lend on any multi family property bigger than a triplex.  Is that true?

Kelly N. · Answer

Hi,

We picked multi family b/c we could find some that were cash flowing, and liked the idea of 'partial vacancy'- one unit might need to be rented out, but the others can still make the payments.  In our market, a MF makes more in rent than a SF for the same price investment.  Insurance for MF will be a little more than SF- more kitchens and baths per the same square footage.

You can get a conventional 30 yr fixed loan on a two to 4 unit property, though I had to put 25% down instead of 20% for a SF. Anything over 4 units is commercial, and I had trouble finding a lender for a 5 unit since we didn't have any landlording experience and  the property value wasn't $500k. (By the time I figured out what we'd need to do, the property had been taken off the market) You can get 4 investment loans like this, then for loans 5-10 I believe you may have to go to 35% down, not sure about SF loans though.  The interest rate will be about .5% higher for an investment property if you aren't occupying it.

Appreciation would be nice, but honestly our goal is cash flow, so I hadn't even considered how a MF performs vs a SF in this arena.

If you are trying to decide between MF and SF, look at what your $70k will get you for a downpayment.  You can buy $280k worth of MF properties or $350k worth of SF.  Of course, this doesn't take into account closing costs of each loan, but you get the idea.

Hope that helps.

Kelly

John Thedford · Answer

I suspect there might be a definite difference between appreciation rates for multi vs SFR. I would like to own a multi unit provided it had enough units. I don't buy duplex units, etc.  If you have a multi pronged investment strategy that will give you diversification.  I know several investors that won't buy multi family in SW Florida due to prices and also know investors that will only buy SFR in SW Florida. Markets are local. You have to determine what is best for you, your comfort level, financial ability, etc.

Mark Ferguson · Answer

In my area I can cash flow better with single family than multi unit properties.  
But, in other markets multi units may cash glow better. 
You have to compare apples to apples.  You said you can by one sfr with cash or a multi unit with down payment.  Of course the returns are better on multi unit because you leveraged your money.  You should compare buying one multi unit with a down payment to buying multiple sfr's with down payment.  You could buy four sfr's with that $70,000 used as a down payment.

Karen Margrave · Answer

Chris Hames   I see you are right up the road from me.. I'm in Lake Forest. Welcome to BP! Have you talked to your bank to see what types of loans are available for multi family, etc. ?  As with everything it depends on the property, the borrower, etc. What area are you looking in?

Joel Owens · Answer

"I heard someone say that banks don't like to lend on any multi family property bigger than a triplex. Is that true?"

Hi Chris and welcome to Bigger Pockets. The statement above MIGHT be true for a particular bank but is NOT true for the banking industry.

You have sfr which banks include duplex, triple, and quad into that category. Then you have 5+ units which is commercial lending for larger multifamily buildings.

For 5+ units banks like to see 75% LTV and the ones I am seeing on fully performing properties have rates in the 4's for 7 to 10 year term and 25 year amortization. Now many banks will let the seller carry back a second of 10 to 15% thereby reducing your down payment to 10 to 15% of purchase price.

Another option you have is partnering with other investors and putting cash in to own a larger apartment building of say 50,60, 100 units etc. where you have the size to have a full time manager and maintenance person.

The problem with the smaller buildings of 5 to 10 units etc. is you can't put the full infrastructure in place. Many of my clients are going after larger apartment buildings in groups or individually.

Hope it helps.