Which is better for your first rental property?

Question

I want to get into buy & hold with SFRs and small multis.  Which (in your personal opinion/experience) is better for a first rental property?  Does it matter?

I will not be house hacking, and I do intend to manage it myself.

Roy N. · Answer

@Adrienne Bryson

It really depends on the life experience you bring to the table and your real estate goals.

I come from a long history of running my own businesses.  My first real estate investment was a duplex, followed by a triplex, a five unit, a couple of student houses and then the larger properties.

I found the act of acquiring residential properties to be frustratingly chaotic with many, many, many ... probably most ... owners having terrible record keeping.  On top of that, properties are valued by comparative sales rather than by the cash-flow they produce.

Once we started pursuing larger properties (say 16 - 30+ units) we found the vendors/owners were far more likely to be running the property like a business rather than a hobby.  Deal evaluation became a lot less frustrating as the property was analysed as one would any business.

Two other reasons I prefer larger properties are:

density - One building envelope (walls, roof, foundation) encompasses many units as opposed to four, or less, for a residential property;

diversification  - a multiunit houses many revenue streams as opposed to 1-4 for a residential property.  If I have two units vacant in a 30-unit building, that's 1/15th of my revenue stream.  If I have 2-units vacant in a quadraplex it is 1/2; two units in a duplex is 100%.

Penny Clark · Answer

@Adrienne Bryson, Those comments made by Roy are spot on about how many rental owners do not run their properties like a business. As a property manager, I have seen many instances of this - outdated leases downloaded from the internet, disorganized payment records from tenants, etc. When they come to us, many times it is out of desperation. They may have lucked in with a couple good tenants at the start, however, their business rapidly deteriorates with one bad tenancy or worse, a devious tenant who knows how to use the landlord-tenant laws to their advantage. For this reason, I am a huge advocate of Bigger Pockets and share the website with many of my clients.

I think if you want to jump into a purchasing a rental and can swing the larger payment, a larger multi-unit may be a better choice. However, if it seems overwhelming to go to that level and you want to stay under 5 units, ask for these items from the seller before you buy:

- copy of tenant leases/agreements, their recent contact information, and payment records if you are inheriting tenants with the sale

- copies of the last six months of utility bills

- copy of CLUE report (insurance underwriter report shows if any claims have been made on property for last seven years)

- list of capital improvements made (if any)

Good luck!

Craig Bellot · Answer

@Willem Hendriks I break down monthly my costs for repairs & maintenance, legal fees, interest, taxes, water, sewer & house meter electricity if present.  It's eye opening to see where most of your expenses are.  But then you can use that information in future purchasing decisions to enhance your profit.

Sam Levin · Answer

We have multi-family buildings in Utah County that are new construction, with great cash flow, that we manage for our investors at 7% of gross rents. With that expense included they are still running at a 7.5 cap. No landlord hassles whatsoever.

David Panzera · Answer

@Adrienne Bryson, we see a lot of investors go with a duplex the first time around, even if they're not house hacking. When you take the advice of the above posters and run it like a business, you can scale your model up for larger MFH purchases, but you're still making a little better monthly cash flow than you would with a SFH. Best of luck to you.

JD Martin · Answer

I prefer SFH's in my market because of the level of saturation with MFH. It is also easier to sell SFHs if you decide to get out of the business. I usually recommend people start with a single home to see if it's for them - i.e. , can they buy right, deal with getting good tenants, run it like a business, etc? If not - and some people aren't cut out for being landlords - you're not into it for much and can get out. MFH multiplies your management responsibility; what you gain by having one roof and one location you subtract by being involved with interpersonal relationships, as there will always be instances of tenants not getting along, ruining the atmosphere for everyone else, etc.

Roy N. · Answer

@Adrienne Bryson

I'll swim against the above current and go with multiple units.  In fact, looking back with what I know now, we would have never bought anything smaller than 6 - 8 units.

But, depending upon your market and your "business" experience, a residential property (1 - 4) may be the better place to start.

Pam Storm · Answer

@Adrienne Bryson @John Walker

I echo what John said - notwithstanding the normal caveat of 'it depends on your goals, market etc' - I would just say that SFH and multi-family are indeed different markets.  I would lean more towards SFH to start since you can get your feet wet while minimizing your risk.  And on the first investment, I would try to make it closer to home before venturing far away.  Again, I think you can learn more that way while minimizing your risks and stress.  Good luck!

John Walker · Answer

@Adrienne Bryson I think it depends on what kind of experience you have managing people in general. I decided to start with SFR since I was not doing house hacking either. It was able to teach me things without jumping into a multi unit situation where you could potentially get overwhelmed since you are self managing. Obviously, the cash flow could be better on the multi's. It just comes down to which way you lean on Potential Cash Flow vs. Less Stress/Learning Slowly. Good luck!

Which is better for your first rental property?

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