are tenants of small multifamily properties riskier?

Question

I live in the mid-atlantic region. Single family homes are my niche, but I am branching into small multifamily (2-, 3-, 4-plexes) properties. They are different from traditional residential rentals in many ways:

- age--I find most are over 100+ years old

- more incidence of units with only one bath

- very basic almost spartan finishes and amenities (often no laundry in each unit)

- the tenants tend to be low-income or very low-income

These differences have me turning over some questions:

Is it harder to find tenants with good credit to fill small multifamily units?

Is it necessary to set lower credit and income-to-rent ratio standards in order to keep units rented?

Is the frequency of tenant default higher?

Are property maintenance costs typically higher? and CapEx? If so, how much or is there a rule of thumb?

Thanks in advance!

Account Closed · Answer

I have owned or managed both, and hands down, I'd choose a multi-family building with small units.  The smaller the better, lol.

I managed a 26 unit building as a resident manager in Silicon Valley.  I lived in one of the units as a resident manager.  My tenants were single retired, single working, single students, and some couples.  We had mostly tiny studios (about 250 square feet), some larger studios and some with large walk-in closets, and a handful of one-bedroom units.  It was built around 1920 and converted into apartments during WWII, during a housing crisis in the Bay Area.  This is why most were tiny studios, and why they were not identical - they had to work with the space they had. It was originally a two-story hardware store.

Our units were very bare-bones.  The location was great - good for techies watching their money, and it was next to a private university.  We didn't even have enough parking spaces to assign to tenants.  No balconies, no laundry on-site, no dishwashers, no elevator (two stories).

What we did offer was a great location, a quiet building (only month to month agreements so problem tenants could be gotten rid of quickly), clean and great maintenance.  And we were just a little under market rate, so it was also a good deal price-wise.

The beauty of renting these types of units, is that you will never get huge extended families, which equal noise, more maintenance requests, more parking hassles, and kids and damage.  You won't have to worry about large, multi-generation families moving into your place and causing parking problems the neighbors will complain about.

In short, they are way less dramatic, use less utilities and cause less damage, and need less of your time.

And, in my experience, you will not need to lower your criteria at all.  You will simply be renting to singles or couples, instead of families.  I rented to smart working young people who rented something inexpensive, while they saved up to buy their first home.  I rented to a few retired people who just wanted to live in a decent, inexpensive, quiet building.  I rented to graduate students (my favorites were law students) who wanted a quiet place to study.

And as far as maintenance, etc., in my opinion, it's much easier and cheaper to have your tenants under one roof.  One roof, one pest control contract, etc.

For what it's worth.

Michael Noto · Answer

I am 100% with Sue K.

I love buildings with 1 bedroom units.

Laura A. · Answer

thanks everyone. Appreciate all the input and feedback.

Jay DeCima · Answer

Laura

Take if from an expert here, you are on to something very good here.  I have invested in groups of simple, affordable, blue collar house for 40+ years in Northern California.

Let me make a slight change in what you are looking at that can have a huge effect on your investing. Instead of a 4-plex, start thinking just a little differently.

My biggest success over the years came from buying GROUPS (5-8 houses) of older homes on a single parcel, in older, blue collar parts of town (not slums). Because banks will not finance these types of properties, 90% of the time I got seller financing (on over 250+ rental homes I had at my high point). The seller knew he/she would be taking back the financing. I did not have to talk them into it. My down payments usually were around 10%.

I suggest you read up on a few kinds of investing you are interested in and then pick the one you think would be the best for you, and one that will not require a boatload of cash to start. Then find the best mentor or expert you can in that kind of investing. Learn from that person and stay focused on their kind of investing. Find some of these mentors on a Google. See how many pages of results pop of for them.

I have written extensively in my blogs over the last several years.  You can view the blog by going to my website link in my BP signature below, then you can search the blog (300+ posts) by CATEGORY.

I also stated a BP blog last week and should post each week.

BP blog at  MANAGING YOUR TENANTS BY MAIL........KEEP YOUR SANITY

Good luck.

Colleen F. · Answer

It depends on the building.  Some other things I have Found about small MF tenants is they are often  looking for someone else to mow the lawn and shovel snow. They want no maintenance. They don't want to worry about the trash. They don't mind community living. Mine tend to be working professionals although I get couples and single parents at times. The size of the unit and the area dictates the tenant pool. Yes they are lower income then SF renters but not if you consider rent/occupant/sq ft.

Michele Fischer · Answer

Most people prefer having more space and privacy with SFR, so they are usually choosing multi's due to the lower cost or ease of qualifying.  Tenants need to do some basic maintenance and upkeep themselves in SFR, in multis they generally rely on the landlord for everything.

We have not seen a difference in default with our duplexes, and generally turnovers and damages are better, but we do have more day to day managing of duplexes - more maintenance, more neighbor issues (including a detailed conversation about a neighbors sex life on the other side of the shared wall), pests (much more difficult to say it is tenant caused in a multi), pet issues, lawn care.

We do not have different criteria for our properties, but we score each application on a point system, and the multi's require fewer points to qualify. , because they attract a lower quality tenant.  When we have had a few higher caliber tenants things have not gone well, their expectations are unrealistic.

I'd look for applicants who have lived at addresses for 2 years or longer (the longer the better) to help cut down on the high turnover.  Think of any niches to set yourself apart, like senior housing, vet housing, or liberal pet policy.

are tenants of small multifamily properties riskier?

Most Popular Reply