030: Single Family Investing vs. Multifamily Investing

SHOW NOTES FOR EPISODE 030 – SINGLE FAMILY INVESTING VS. MULTIFAMILY INVESTING

In this episode, Bill Manassero compares single family home investing to multifamily home investing.  Examining the “pros” and “cons” of each, he concludes with a “real life” single family vs. multifamily financial comparison, assuming he buys 22 single family houses and one 22-unit apartment (single-family-vs-multifamily spread sheet PDF link attached).

Overview

I will first share pros and cons of each and then, I actually did some research to do a hard funds comparison using real life examples on which is better dollar-for-dollar.  I used my 22-unit multifamily in Indianapolis and compared it dollar-for-dollar to the purchase of 22 real single family homes in Indianapolis with some very interesting results.

PRO SINGLE FAMILY

1. Cheaper to buy
2. Easier to finance
3. Easier to buy
4. Easier to sell
5. Easier to find
6. Gets rented faster in some cases
7. Less turnover
8. Better quality of tenant??? questionable
9. Tenants don’t argue because only one tenant
10. Easier for tenants to pay ALL utilities
11. Tenants generally cover lawn, snow removal, no garbage service fee, pool maintenance
12. Can often net more per month
13. Great for slow growth plan – can buy one home a year by yourself
14. Don’t need other investors

CON SINGLE FAMILY

• Does not cashflow as well as multifamily
• Riskier – when the home is vacant you have 100% vacancy – you still must pay mortgage, utilities, etc.
• Less tenant prospects because rents are usually higher in SFRs ???
• Maintenance may be higher. If repair guy goes to multifamily, you can get him to do more while there – get more for less.  No economies of scale
• Not usually as close to major things (main roads, public transportation, retail shops, offices). Multifamily usually built in higher density areas

PRO MULTIFAMILY

1. You make more money quicker – great for seniors!
2. Higher cash-on-cash returns
3. Cashflows better – many more units, slightly lower price per unit
4. Economies of scale are better (especially for out-of-town investors)
   1. Easier to buy one 22-unit multifamily vs. 22 single family homes
      1. One closing vs. 22 closings
      2. One mortgage vs. 22 mortgages (oops! Most banks will not extend more than 10!)

• One negotiation vs. 22

1. Per unit expenses are less – Each property has to be:
   1. Landscaped
   2. Snow Plowed

• Mechanicals serviced

1. Roofs serviced/repaired
2. Driveways maintained

1. Less paperwork/records to maintain
   1. One insurance policy vs. 22
   2. One property tax payment vs. 22
2. Broader tenant pool to choose from
3. Also, can repair/rehab one unit, while others are still generating cash. Not case with SFR
4. Higher per-square-foot rent
5. On per-unit basis – less than SFR
6. Easier to sell one 22-unit than 22 SFRs
7. Less expensive to manage. Cost of property manager: SFRs – 10%  / Multifamily 4-7%
8. Requires Property Managers – that means you can be a more passive investor. Also, property managers are usually better managers
9. Lending on multifamily does not rely as much on personal credit score but on the property’s income/profitability
10. Property value of multifamily is based on a combination of income, profitability and R-O-I, CAP rate. Single family based on the market/local comps.
11. You can have “forced appreciation” – You have more control
    1. Buy increasing rent, you increase the value of the property
    2. Reduce expenses, you increase the value of the property
    3. Rehab, rent increase, expense reduction, combined with re-positioning strategy can generate significant wealth in short period of time
12. Less risky – Spreading risk over more units
    1. If your SFR is empty you have 100% vacancy and you still must pay the mortgage
    2. With MFP, one-even 10 vacancies, you still have 50% vacancy and remaining tenants pay the mortgage
    3. Limit downside risk by having multiple tenants pay expenses
13. Less Competition
    1. Less people buy multifamily
14. More upside – Because you’re acquiring more units quicker than with a SFH strategy and you can create so much additional value by optimizing the performance of your property, the upside of apartment buildings can be significantly higher than with SFHs.

CON MULTIFAMILY

1. Multifamily often requires staff: property manager, maintenance person(s)
2. Harder to sell – limited buyer pool
3. More tenant issues as walls and common areas are shared
4. Additional maintenance costs for common areas, pools, etc.
5. Appreciation tied more to rents than the market
6. Generally appreciate slower
7. Tenant placement tends to cost more
8. Can cost more if tenants do not have separate utility meters
9. Landlord needs to pay common area maintenance expenses (lawns, security, etc.)
10. Tenant squabbles
11. Multifamily tenants do not generally stay as long as SFR tenants
12. Financing more complicated, more difficult to obtain
13. Financing rates generally higher

To see the financial spreadsheet that Bill referenced in the podcast, go here: single-family-vs-multifamily spread sheet PDF link attached

No matter which option you take you cannot go wrong.  Real estate is a great investment vehicle to build wealth and passive income.

It’s not always a financial decision.  It depends on the person and that person’s goals.  You may have one person may, for example, who wants to put $1,000 away each month and, every six months, buy a property for $6,000 down.  They may want to grow their portfolio over a 10-20 year period.  Another may be interested in immediate high cashflow.

Well, that’s it for today!

So, until next time, remember CASH FLOW IS KING AND REAL ESTATE INVESTING THE MEANS.  Thanks again for listening and God bless!

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