Single family vs multi family

[Casey Perkins]

I have been drawn to investing in real estate for years. But my career has taken me a different direction. But I have finally built our business to the point where I want to start diversifying into real estate! I have some very lofty goals and will achieve them, but I have to start some where. I have read many book on the subject of investing and I am torn on whether I should start investing with single family or multi family. I am curious on the differing opinions. Please share your expert advice.

[Ross Denman]

It really depends on the market that you are targeting. For instance, I am not a fan of duplexes in Indianapolis. They are usually in lower income areas. Most people prefer SFR's so multi's aren't usually as desirable in Indianapolis which means worse tenant demographics with longer and more frequent vacancies. This does not mean that I don't have successful clients with duplexes, it just means that I am not sure that they outperform SFR's over a longer period of time and they tend to have more headaches.

That changes when you get to 3-4+ units. While you still have to deal with the same headaches, the cash flow can become considerably better.

If you compare this to NYC or Washington DC, multi's are considerably different because of the cost of living and population density. It's very expensive to own an SFR in these areas... it's also very expensive to rent an SFR. Stable and quality people rent these units in areas like this.

Unfortunately, there is rarely a one-size-fits-all answer to these kinds of questions. You have to determine your goals and resources, risk tolerance, markets, etc. I am more risk averse than a lot of investors. I try not to gamble with my investment money or my clients investments and can usually identify a good deal in a very short period of time. I am cautious about how much I leverage versus how much I have put back for reserves. I have seen a portfolio of 9 homes almost topple in one year because 5 tenants moved out, all of those homes needed a fair amount of upgrades, two needed roofs, and the investor wiped out all of the income from the properties over the last 2 years. Fortunately, he was smart enough the stockpile the $2,000/mo net rents from the entire portfolio... but he had about $40k in expenses in one year for these 5 properties. After financing he's only cash flowing $200-250/mo... this doesn't go very far.

You need to create realistic goals. Identify your resources, Make a plan. Test it. Try to break it. Diversify.

My "realistic" goals are to

• Rehab homes that yield 15%/deal with a minimum of $15k profit. 
• Own 20% of my rental portfolio without financing with an ROI on those properties of at least 8.5% annual average over 5 years.
• Finance the other 80% of rental properties with a goal ROI of at least 12.5% annual average over 5 years.
• Hold at least $5000/unit in reserves.

I don't care if they are multi's, SFR's, or apartment buildings, but duplexes are my least favorite for this market.