Two small multifamily or one bigger one?

Question

I am starting to look into properties to buy, and have a question for those who have already gone down this road: is it better to buy two small multi-family (say, duplexes) or one larger one (say, 4-6 units)? What are different ways to measure this? I can think of money down, closing costs, cash on cash return, cash flow, management/maintenance.... How do you think these (or other metrics) would compare in 2 small MF vs. 1 larger MF?

Patsy Waldron · Answer

@Sue Kelly- My thoughts exactly!!! I would MUCH rather deal with fewer, but larger, properties than have to keep track of dozens of properties. The way I see it, there are significant management efficiencies and savings from reducing the number of properties while increasing the number of units. So that's where I am headed- a few large properties. But at the very beginning, I need to make sure that what I buy/ invest in does in fact help me to take the next step and get to where I want to be someday... So it's important to start off right- I just need to remember, though, that there are several right ways to start and maybe it doesn't really matter how I do it!

Love your take on duplexes! I have never lived in one, and personally prefer smaller properties with a yard, but I can see your point about tenant dynamics.

Kelly N. · Answer

We invest in small multi units- 2-4 units each.  Out of those, I prefer 4 units, then 3, then 2.  With 4 units you are maximizing what your deposit/loan gets you, if one unit is empty then you still have 3 generating cash, etc.

Once you start looking at 5+ units, they are now classified as commercial real estate so financing changes and so does insurance.  30 year fixed with 25-30% down and low fixed rates are no longer an option, you have to get a commercial loan, which from what I have seen means a higher interest rate and shorter term (20 year max I think).  When I was looking for this type of loan for our first purchase, I couldn't find anyone who would lend me the money since I didn't already have experience and wasn't looking at $500k worth of property.  Most of the insurance companies I currently deal with don't insure 5+ buildings so I am not sure what the rates look like in comparison.

Also, in our area, 1-4 units have trash pick up included in the property taxes, 5 units and up must have trash services themselves.  Tenants seem to prefer smaller buildings like a duplex over larger apartment buildings, at least those without added amenities like an exercise center and a pool for example.

Account Closed · Answer

@Patsy Waldron I would prefer to have one building with multiple units.  One roof, one pest control contract, one parking lot to maintain, one gardener, etc.

And I personally really dislike duplexes as a renter.  You're too close to your one and only in-house neighbor.  It's more like having a roommate.  When your neighbor has people over or they barbecue in the backyard, etc., it is like having them in your house.  I think tenants in a duplex are more likely to bicker over guests taking up parking spaces or not keeping their side of the porch clean, etc.  They're just too close.  And I think what tenants in a duplex really want, is a SFH.  But, they can't afford one, so they go for the duplex, but still want the privacy and control of the SFH, which of course, they can't have.

Anyway, as a tenant, I prefer a bigger building with more units.  My neighbors in a building with 50 apartments, are way less likely to come by asking for a cup of sugar, etc., LOL.  I like the anonymity.  And by and large, people who move into apartment buildings, expect to hear a little noise, etc.

As far as managing, I'd rather just have one building to manage.  It's easy to schedule one day with a window of 9 - noon, for instance, to do your 6 month inspections.  Bam, bam, bam, you knock on the door, check the smoke detector batteries, check for leaks under sinks, make sure the A/C isn't dripping inside, check quickly in the shower for mold, ask the tenant if there are any issues they need to report - and bam, knock on the next door.

I don't know about the other issues as far as resale and financing, etc.  But, from a management perspective, I'd go for one building with more units, over several buildings with fewer units.

Patsy Waldron · Answer

@Chris Jackson- Great food for thought! I do want to move up to large MF eventually, yes. Right now I am just focusing on getting my toes wet and figuring out the game, but you are absolutely right that I can't let my desire for the first deal to be perfect paralyze me. I need to just focus on finding the right deal- and that means analyzing lots and lots of them! Thanks for the insight.

Chris Jackson · Answer

@Patsy Waldron

One could also buy 2 duplexes and a single SFR all with renters and package them up as commercial portfolio to the next investor when you are ready to sell.  Just keep that in mind.  Having options is critical. The beauty of creative thinking in REI.

Maybe on your sale of the portfolio of 5 you would rather have an appraiser apply more weight to the income approach because you were a rockstar and go the total NOI to a place that exceeds what the value would be on more of a comparable sale approach.

What I would do is just look for deals.  Do you see a 5 unit ready to go that you know you achieve X NOI and thus beats out the opportunities you are seeing in duplexes?  Do you see a duplex that you know you can buy at a discount, get the rents up and cash flow nicely?  If yes then do that and buy another 1 after.  Now you are starting to build track record.

Do you have the dream of moving right into bigger mutlifams?  10 20 30 50 100 200 units?  If yes you can still buy duplexes but just know buying 5 units and up is a bit of a different paradigmn in brokers you are talking to, the banks you are talking to, the PMs(sometimes).  It just a different lingo. One gets really obsessed with cap rates, NOI, above the line, below the line, I/O, prepay penalties, amort timelines.

Don't go too nuts on "i want this first deal to be perfect so that is set ups everything from this point on the right way. I dont want to lose time"  Like I said if you see a duplex that rocks and fits your criteria go buy the thing.

Patsy Waldron · Answer

@Dustin Beam and @Kelly N.- Good points! Thank you for your input. I agree that the main advantage with smaller properties is that they can be bought, run and sold as SFR and that can mean some serious savings and less hassle when buying and selling them.

The loan portion- I am self-employed and it is a pain to get a traditional mortgage anyway, so the commercial loan doesn't scare me as much. I want to make sure I maximize the return per unit, especially as I am starting out and future investments will depend on the first purchases cash-flowing as much as possible.

Dustin Beam · Answer

I like to preface my advice w/ the "I'm new to this, so take my thoughts with a grain of salt". So with that said....

Although my property is multi family and likely, most property I purchase going forward will be the same, I do like one thing in particular when it comes to SFH and duplexes: you have a better shot at selling at retail prices and quicker because you'll be marketing to normal home owners, not investors. Granted, someone might buy a fourplex to live in and rent 3 out, but that's a specialized buyer.

Plus w/ a duplex, depending on how it's set up, you might be able to get the tenant's to pay for trash, water, and take care of the lawn, snow removal, etc.

There are definite benefits to larger multi family as well, like a single roof for mulitiple units, consilidation of location, maybe cashflow, etc.

And one more thing real quick, if you don't already know, financing might be different if you get a 5 unit or higher. Those will be commercial. You should have the option to go traditional or commercial on smaller multi units, but just be aware that it will be commercial if 5 or more.

Two small multifamily or one bigger one?

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