- This topic has 8 replies, 6 voices, and was last updated 7 years, 6 months ago by
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I’ve always been a single family investor, but I’d love to add multi-family to my portfolio for diversification. I think I have been attracted to single family because they are easier to get into (less money), vacancies are typically lower, and although I can’t prove it the quality of tenant seems to be better.
Although probably a biased opinion, here’s a good article from a turnkey provider that discusses the differences:
http://blog.memphisinvest.com/single-or-multifamily-which-is-the-better-real-estate-investment
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I think it depends on your long term strategy and favorite “flavor”. It also depends on your definition of multi-family. A single family home can be a great investment and tends to appreciate more than apartments. It gives you the most exit strategies: rent, lease option, MLS sale (flip or as is), other investors, owner carry, etc. It also gives you the most potential problems with vacancy unless you own more than a few doors.
Apartments (5+ units) give you some cheaper costs because of economies of scale, but (typically) will tend to attract a slightly lower quality tenant than an equivalent SFR. You can only hold it or sell to another investor because an apartment complex is not a home. Typically, your financing is not going to be long term fixed, which adds risk as well. On the other side, you get economies of scale, your doors are all in the same place, and you know your value will always be calculated the same way rather than “this is what everyone else thinks”. SRF will give you more headaches because of the distributed locations.
Ultimately, it’s more about what you are after. Both are awesome types, but some align better with one investor vs another. -
I’ve chosen to invest in multi-family for the economies of scale and the valuation method. The economies of scale on operating the property is great, but don’t forget about the more streamlined way to increase the value of multi-family and that you can perform due diligence and close once to acquire multiple doors.
As you may know, multi-family investments are valued based on the net operating income. If I have 5 apartments and increase the rent by $100 the NOI may increase by around $5,400, at an 8 cap (in my area) that’s an extra $67,500 in value. With a 50 unit apartment the value increases by $675,000. Sure it takes more money to invest in these but you can start small with an 8 unit, implement your business plan to increase the value and build up to larger and larger deals.
I’ve had single family homes in the past and still have 2 left. Having all the exit strategies are great, but to me it’s more of an transactional model where most business plans lead to selling off the home in some form or fashion. As @bryan said, if you’re unsure it’s really up to what interests you more.
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I’m biased because I never considered single family investing as a viable business model for myself. I’ve financed apartments for over 25 years, which only adds to my bias. But that also means I’ve studied long and hard the business model to apartment ownership and investing and can say from experience that I’ve financed some of the wealthiest and smartest (and some not so smart) people. If you routinely listen to podcasts from Michael Blank or Rod Khleif or Joe Fairless, you’ll see a pattern that many who start in SF, ultimately run out of credit and have difficulties with scale. SF is subject to market cycles that MF deals are not. Risk adjusted, MF is the hands down winner every time. Now it’s larger, more intimidating, requires more capital and experience. But all of those issues can be solved with education, networking, partnerships, and understanding leverage. Happy to talk MF with interested investors and military members. Best of luck to you!
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@MI Partners Hi Paul. I’ve been hearing a lot about how CAP rates are shrinking in the multi-family space and that it may not be the best time to buy. I believe Ken McElroy recently said on a BiggerPockets podcast that their company has stopped buying for now because they think the apartments are topping out. So, just curious how you are mitigating the risk of shorter term lending (10 year commercial loans), with low CAP rates at the top of a market cycle?
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Ron, I hear your (and others) concerns about cap rates. My perspective is based on 25+ years in the multifamily finance industry. I’ve seen the cycles and if you take the long term approach, in my opinion, there’s not a bad time to start. But there are still bad deals, just like there are good deals. So you have to adjust your risk tolerance, like Ken McElroy, and decide if your market (or all markets) are “over heated”. But I’d ask, compared to what? If you’re a real estate investor, does that mean that you shift to other asset class (office, mobile homes, self storage, industrial)? Doesn’t that have a learning curve and risk adjusted returns as well? And can you afford to park your money? If you have funds of any significance, putting it in the bank means you’re not putting it to work in any real capacity.
If you look at the financing that’s available for real estate, housing offers the highest leverage, longest term, lowest interest rate. With apartments, you can get fully amortizing and non recourse, making it even more attractive compared to single family.
I’m extremely cautious about deals that offer “quick flips” (relatively speaking) in multifamily. I’ve seen (and continue to see) a bunch. Short term debt with exits in less than 5-years. It has been a successful model for the past 10 years. But in a rising interest rate/cap rate environment, the exit is risky. I think it’s ok to business plan for a 5-year exit, but be prepared for 10+ years if necessary. The financing allows you to do this. 10 years is usually long enough to read the cycle and plan accordingly. But if you want longer terms, you can get it from Fannie/Freddie and especially from HUD. If you’re a strong enough investor, and have a track record plus even more equity to put down, you can get nice terms from a life company loan.
Final thought, consider the age of the asset compared to the exit year. If you’re investing in a 50 year old asset, you’re going to sell/exit when it’s 55 years old. If it hasn’t been substantially renovated or you haven’t done that as part of your business plan, you’re going to be selling against newer assets. For me, I don’t like deals that were built before the early 2000’s. In order for an apartment to remain competitive in the market, it will need a substantial renovation every 10-15 years.
Hope this helps.
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@MI Partners Thanks for the awesome explanation. Your thoughts make sense. My only concern would be that I buy a multifamily at the peak of the market with a tightened cap rate, and I can only get a 10 year loan on it, and the market shifts downward (due to the normal cycle) and I lose the value and can’t sell and can’t refinance by my 10 year mark. I guess that’s one of the reasons why I’ve stuck with single family for so long; I really like having a 30 year loan so I’m not as worried about the 10 year cycle and getting stuck with a loan on an undervalued property.
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Read this today and remembered this thread. Joe lays out the case pretty well.
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Posts
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I’ve always been a single family investor, but I’d love to add multi-family to my portfolio for diversification. I think I have been attracted to single family because they are easier to get into (less money), vacancies are typically lower, and although I can’t prove it the quality of tenant seems to be better.
Although probably a biased opinion, here’s a good article from a turnkey provider that discusses the differences:
http://blog.memphisinvest.com/single-or-multifamily-which-is-the-better-real-estate-investment
-
I think it depends on your long term strategy and favorite “flavor”. It also depends on your definition of multi-family. A single family home can be a great investment and tends to appreciate more than apartments. It gives you the most exit strategies: rent, lease option, MLS sale (flip or as is), other investors, owner carry, etc. It also gives you the most potential problems with vacancy unless you own more than a few doors.
Apartments (5+ units) give you some cheaper costs because of economies of scale, but (typically) will tend to attract a slightly lower quality tenant than an equivalent SFR. You can only hold it or sell to another investor because an apartment complex is not a home. Typically, your financing is not going to be long term fixed, which adds risk as well. On the other side, you get economies of scale, your doors are all in the same place, and you know your value will always be calculated the same way rather than “this is what everyone else thinks”. SRF will give you more headaches because of the distributed locations.
Ultimately, it’s more about what you are after. Both are awesome types, but some align better with one investor vs another. -
I’ve chosen to invest in multi-family for the economies of scale and the valuation method. The economies of scale on operating the property is great, but don’t forget about the more streamlined way to increase the value of multi-family and that you can perform due diligence and close once to acquire multiple doors.
As you may know, multi-family investments are valued based on the net operating income. If I have 5 apartments and increase the rent by $100 the NOI may increase by around $5,400, at an 8 cap (in my area) that’s an extra $67,500 in value. With a 50 unit apartment the value increases by $675,000. Sure it takes more money to invest in these but you can start small with an 8 unit, implement your business plan to increase the value and build up to larger and larger deals.
I’ve had single family homes in the past and still have 2 left. Having all the exit strategies are great, but to me it’s more of an transactional model where most business plans lead to selling off the home in some form or fashion. As @bryan said, if you’re unsure it’s really up to what interests you more.
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I’m biased because I never considered single family investing as a viable business model for myself. I’ve financed apartments for over 25 years, which only adds to my bias. But that also means I’ve studied long and hard the business model to apartment ownership and investing and can say from experience that I’ve financed some of the wealthiest and smartest (and some not so smart) people. If you routinely listen to podcasts from Michael Blank or Rod Khleif or Joe Fairless, you’ll see a pattern that many who start in SF, ultimately run out of credit and have difficulties with scale. SF is subject to market cycles that MF deals are not. Risk adjusted, MF is the hands down winner every time. Now it’s larger, more intimidating, requires more capital and experience. But all of those issues can be solved with education, networking, partnerships, and understanding leverage. Happy to talk MF with interested investors and military members. Best of luck to you!
-
@MI Partners Hi Paul. I’ve been hearing a lot about how CAP rates are shrinking in the multi-family space and that it may not be the best time to buy. I believe Ken McElroy recently said on a BiggerPockets podcast that their company has stopped buying for now because they think the apartments are topping out. So, just curious how you are mitigating the risk of shorter term lending (10 year commercial loans), with low CAP rates at the top of a market cycle?
-
Ron, I hear your (and others) concerns about cap rates. My perspective is based on 25+ years in the multifamily finance industry. I’ve seen the cycles and if you take the long term approach, in my opinion, there’s not a bad time to start. But there are still bad deals, just like there are good deals. So you have to adjust your risk tolerance, like Ken McElroy, and decide if your market (or all markets) are “over heated”. But I’d ask, compared to what? If you’re a real estate investor, does that mean that you shift to other asset class (office, mobile homes, self storage, industrial)? Doesn’t that have a learning curve and risk adjusted returns as well? And can you afford to park your money? If you have funds of any significance, putting it in the bank means you’re not putting it to work in any real capacity.
If you look at the financing that’s available for real estate, housing offers the highest leverage, longest term, lowest interest rate. With apartments, you can get fully amortizing and non recourse, making it even more attractive compared to single family.
I’m extremely cautious about deals that offer “quick flips” (relatively speaking) in multifamily. I’ve seen (and continue to see) a bunch. Short term debt with exits in less than 5-years. It has been a successful model for the past 10 years. But in a rising interest rate/cap rate environment, the exit is risky. I think it’s ok to business plan for a 5-year exit, but be prepared for 10+ years if necessary. The financing allows you to do this. 10 years is usually long enough to read the cycle and plan accordingly. But if you want longer terms, you can get it from Fannie/Freddie and especially from HUD. If you’re a strong enough investor, and have a track record plus even more equity to put down, you can get nice terms from a life company loan.
Final thought, consider the age of the asset compared to the exit year. If you’re investing in a 50 year old asset, you’re going to sell/exit when it’s 55 years old. If it hasn’t been substantially renovated or you haven’t done that as part of your business plan, you’re going to be selling against newer assets. For me, I don’t like deals that were built before the early 2000’s. In order for an apartment to remain competitive in the market, it will need a substantial renovation every 10-15 years.
Hope this helps.
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@MI Partners Thanks for the awesome explanation. Your thoughts make sense. My only concern would be that I buy a multifamily at the peak of the market with a tightened cap rate, and I can only get a 10 year loan on it, and the market shifts downward (due to the normal cycle) and I lose the value and can’t sell and can’t refinance by my 10 year mark. I guess that’s one of the reasons why I’ve stuck with single family for so long; I really like having a 30 year loan so I’m not as worried about the 10 year cycle and getting stuck with a loan on an undervalued property.
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Read this today and remembered this thread. Joe lays out the case pretty well.
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