Condo or Single Family Home?

Question

My question is this, based off my income and down payment, I could purchase a 2 bedroom condo right now, but if I wait about 5-6 months I could have enough of a down payment to afford a 3 bed 2 bath single family home. I’d like to House Hack and I am a fairly handy guy and plan on doing some renovations myself. Which route should I go?

I really like the idea of waiting the extra time for the single family home as I feel I can do more home renovation and landscaping myself with the bigger home but getting into a home and building some equity during these low rates is also fairly appealing to me.

This would be my first deal so I haven’t quite found my niche but once I have some cash flowing rentals, I’d eventually like to get into some multi family homes. Any and all advice is appreciated!

Account Closed · Answer

Wait until you have enough money to purchase 4-plex and you will many times more money. Sometimes, there are many 4-plexes you can get into almost for the same price as a single-family home and the profits are almost exponential when you increase the rents even just a little bit every year. Attached, is an example of what 4-plexes can do.

I always found that condos are much easier to purchase than they are to sell when there are many condos for sale in the same complex and buyers purchase other condos all around your condo. I find that owning some condos can be like owning an apartment in an apartment building where you have bad tenants and bad management and you can't pay enough money to get out. Many condos has horrible management and condos can have some serious major expenses both inside your unit and when there is a major problem outside your unit and everyone has to share the cost to replace a $10,000 to $30,000 water, sewer, or gas pipe, or when a pipe breaks under the concrete slab in your unit.

While the appreciation for some single family properties in some areas you cannot rely on appreciation in many areas. I purchased properties in some out-of-state areas hoping properties would increase by 4% per year and they are not worth a significant amount more, 15 years later. The best money you earn is from appreciation and rental income barely keeps up with inflation, but multi-unit properties increase in value almost exponentially when you increase the rent.

When you purchase properties you should write a business plan where you want to earn 50% to 100% on your investment capital every 1 to 2 years. This is very simple to achieve if you set this business model, but you will not achieve this goal if you don't use this business model.

Example. If you have $50,000 to invest, you want to purchase a property where you will earn 50% to 100% on your money within 1 to 2 years. This is simple to achieve if you put $50,000 down on a house or multi-unit property if you purchase a property that is either  under-priced, or you purchase a 4-plex or more units where the landlord did not make repairs so he could increase the rents and you make a fer minor repairs, increase the rent and now your multi-unit property is worth $100,000 or $200,000 more than you paid and the increased value is based on both the additional income and based on the increased property value based on the rent annual Gross Income multiplied times the Gross Multiplier plus the Annual Gross Income as shown in the image below. YOu cannot increase the value of a single family home by increasing the rents, but you can increase the value by making small improvements like by painting, making changes to give the property more curb appeal, installing new windors, etc., but i a 4-plex or more units will almost always  give you much better profits.

Alex K. · Answer

This made my ears perk up. The only thing I am confused about in this fourplex example is. I thought that up to 4 units I am still tied to comps in my area in Los Angeles?  Does the rents really affect value that much on a 4 plex in los angeles or OC? I am not challenging your opinion , but asking because I am considering a househack on a tri or quadplex in los angeles or oc within the next couple of months.

Thank you,

Aaron W. · Answer

@Kevin Tunnell I don't think there is a wrong answer here. This is about your preference and goals in investing in this property.

5-6 months from now, the rates will likely still remain low so that should be less of a worry. What I would look at is the future potential of the property. What is your goal in investing in real estate and what goals do you need to accomplish these goals? Which property will help you move closer to accomplishing the goals?

Best of luck!

Wale Lawal · Answer

@Kevin Tunnell Get a decent deal and use a local hard money to purchase and remodel it.

Once completed, refinance and live in it for a year or as long as you want to then rent it out to a happy tenant or sell it and go do it again.

Single Family is ALWAYS preferred by majority due to some strict rules and regulations with Condos.

Goodluck man!

Mike L. · Answer

@Kevin Tunnell

Hot take:

I would buy the most expensive home you can afford as long as the rent numbers pencil comfortably. Reason 1, your principal pay down is going to be larger each month because of the current low interest rates. 2 because you will be living in the house, you can put very little down ( I put 5% down, repped myself, and negotiated a buyer credit so I only came out of pocket about 1%). These points are true of any priced home, but when you can put such little down, I’d stretch as much as you can.

The primary house loan is very powerful and should be taken advantage of by young singles often. I can no longer jump around as much getting primary home loans because my kids are getting school age.

Jon Schwartz · Answer

@Alex Ko, appraisers use a prevailing gross rent multiplier (GRM) to calculate value on residential multifamily.

GRM is like a cap rate, but it doesn't take expenses into account. It just analyzes the gross rental income for a property.

The best way to think of GRM is, "How many years' worth of gross rents would it take to pay off the property in full?"

To get a GRM, you divide the price of a property by a year's worth of gross rents.

Conversely, if you have a sense of what the GRM for a neighborhood is, you multiply a year's worth of gross income by the GRM to ascertain a building's value.

For example, today I was valuing a duplex in San Pedro. The prevailing GRM based on recently sales is 17, and this duplex generates $5100 of gross rental income per month. The value equation looks like:

$5100 x 12 (month) x 17 (the GRM) = $1,040,400

Best,

Jon

Alex K. · Answer

@Jon Schwartz

Hi Jon ,

Thanks for responding again. I really do appreciate it. So , for the income approach when an appraiser goes to find value for a residential multifamily what method are they using typically ?

Are they still using (NOI / Cap Rate)  like in commercial multifamily or are they using a different form of calculating/ appraising  value ?

Maybe I'm thinking too far ahead of myself but I want to learn this stuff and this is the stuff that's fasinating selfishly for me tbh.

Jon Schwartz · Answer

Fourplexes are residential multifamily, so yes, the sales comparison approach will be used in the appraisal.

However, because it's also an income-generating property, the income approach will also be used in the appraisal, and then the two numbers will be reconciled somewhere in between.

I have a residential multifamily in LA that was recently appraised at $2.36M on the sales comparison approach and $2.365 on the income approach. The appraiser decided to reconcile down to $2.36M. I could have argued that the true value is the average, $2.3625M, but why quibble?

Brandon Terrazas · Answer

@Kevin Tunnell The only market that I have looked at condos is Houston Texas. So if you are not in that market take what I say with a grain of salt. It has been my experience that HOA fees in condos destroy casflow.

Bruce Woodruff · Answer

Oh, man that is a basic point of knowledge, maybe you should do some more studying before you venture into this game. OR just buy a SFH.

I hear ya about Cali prices......ever given thought to moving or investing OOS?

Good luck!

Condo or Single Family Home?

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