SFH vs MFH cash flow argument

[Eric Gross]

Good morning BiggerPockets! I would like to propose a debate in between Multi family and SFH. I am currently undecided on which property type i prefer for my first deal. My goal in real estate is to cash flow so that I can leave my job in due time. I would love feedback on the pros and cons of both and which one you prefer. Thank you!

[James Wise]

@Eric Gross The key is to leverage your money properly. So it isn't a question of MF or SFR. You should do both! Utilize the money that is out there so you can build a huge net worth!

You buy a property using someone else's money (the bank) then have somebody else pay off the bank (the tenant) What could be better than that? NOTHING!

For non owner occupied purchases of residential property (1-4 units) you are capped at 10 mortgages. 10 rental properties or 1 primary residence and 9 rental properties is a nice start to a great portfolio but nothing you could live off of.  To buy these homes you would need at least 25% down to purchase each property. 

Your from Ohio, never been to your town but let's run the numbers on a typical property in my hometown of Cleveland, Ohio as an example of the type of portfolio you could build using this strategy of SFR 1st then MF 2nd. I imagine the numbers in your town are very similar.

(FYI to everyone reading this thread...The numbers below are based on properties in reasonable neighborhoods. Sometimes investors get greedy and attempt to buy properties in questionable neighborhoods because the rent to purchase price ratio is better. That may work sometimes but more often than that it can lead to disaster, don't get all excited & be that guy as these numbers can be found in most Midwestern towns. So if you find better numbers then this elsewhere it's not a better market you are just looking at lower quality properties in a similar market.)

123 Main street in Cleveland, Ohio.

• Price: $100,000.00
• Down Payment: $25,000.00
• Loan Amount: $75,000.00

Monthly Breakdown

• Monthly Rent: $1,500.00
• Monthly Mortgage Payment: $474.00 (Assuming 4% interest, 30 years)

$1,500.00 less your mortgage nets you a profit of $1,026.00 per month, but let’s not get too excited just yet. There are many more fixed and variable costs that we need to account for.

Monthly Operating Costs

• Taxes: $168.00
• Insurance: $65.00
• Utilities: $150.00
• Vacancy: $75.00
• Repairs, Maintenance & Capital Expenditures: $150.00
• Non-Payment of rent: $75.00

After accounting for all the proper expenses that leaves the investor with a net profit of $343.00 per month. If the investor chose to hire a professional property management company that would bring the net profit down to roughly $193.00 per month.

The self managing investor would net roughly $4,116.00 per year. Since the initial cash investment was only $25,000.00 that is a return on investment of 16.5% and the investment would pay for itself in a little over 6 years.

If the investor hired a professional property management company the investor would net about $2,316.00 per year which is a return on investment of 9.3%. It would take almost 11 years to recoup the $25,000.00

Now multiply those numbers by 10

We have a profit of $41,160 for the self managing investor & $23,160 for the passive investor. Not a bad start, but you aren't quitting your job with it. Sooooo

What does the investor do once they reach 10 residential mortgages?

Move onto multi-family investments.

After hitting your residential rental property mortgage limit it’s now time for the investor to move onto investing in multi-family properties. If you purchase a property that has 5 units or more it no longer falls under the residential financing restrictions. These properties use commercial financing and there is no cap to how much capital you can borrow so long as your credit and experience qualify and the loan amount hits the proper debt service coverage ratio.

This is what I did with my portfolio and it worked out very well for me. At this point in my life I rarely look into purchasing anything that has less than 4 units in it. If I do buy a residential property it is usually with cash or some type of owner financing & I am flipping it or holding for the long term with an owner financed note.