Would you rather have 1 dollar bill or 10 dimes?

JUSTIN MOY

BACKGROUND

Today I want to talk about single family homes versus multifamily properties because it’s a question we get all the time. The truth of the matter is...there isn't a right answer. Just like there isn't a right answer to the question "would you rather have 1 dollar bill or 10 dimes?"

Both equal $1, both can create the same value in the future, so I wanted to talk about the value (pros) and downsides (cons) of choosing an investment strategy that involves buying up SFHs.

So there’s pros and cons to this type of investing so I wanted to lay them out there for you and let you decide if the SFH route is the right one for you.

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THE PROS:

There are quite a few pros to investing in SFH (Single Family Homes), and many people start their real estate investment journey here. Let's walk through some of the positives of this strategy:

1. Financing: Most SFHs can be purchased with conventional lending or even other loan products that only require as little as 3% down. So even if you don’t have a ton of liquidity, it’s very possible for you to get started investing into SFHs very quickly.


2. It’s easy to start: Chances are if you’re reading this blog, you have some money you’re looking to invest or will shortly. If you have cash to finance a property even with just 3% down, you can start the process just like buying a regular home with just a few regulations you may have to meet if you don’t plan on living in that property.

Not only is the financing easy for you to lock down, but you can get connected with residential realtors in your area who should be excited to share their listings with you and add you to their buying network. You could start getting listings as early as today.


3. Simple to underwrite: With SFHs it should be fairly easy to underwrite and create projections. Since you’ll most likely be dealing with only 1 tenant, 1 income stream, and 1 set of expenses and not per unit expenses, you should be able to figure out your profit and losses fairly easily. Also since there is only 1 floor plan, you won’t have to juggle different prices for different size floor plans and square footage and you should be able to get a comparable report of rents very easily.


4. Dealing with only 1 tenant: I have had conversations with many many investors who have had 1 tenant in their property for years and years, meaning their vacancy factor has been 0% and they consistently get cash flow. If you’re able to screen the tenant very well, it could become a very simple and easy to maintain and manage the property.


5. You could house hack: If you’re planning to purchase a duplex, triplex or fourplex, you could live in one side and collect rents from the others, bringing on some additional benefits of debt paydown and also you could qualify for different and more favorable lending terms. This could also make management easier since your tenants are connected and you can handle issues very quickly and have easy access to tenants and your units.


While there’s other benefits we could talk about, these 5 are by far the most prevalent and what most investors who work in this space enjoy the most, but before we decide to commit all in on SFHs, let’s talk about some of the cons and large reasons why lots of SFH investors step into multifamily.

THE CONS:

1. Timely to scale: What most investors in this space envision (unless they’re full time investors) is they’ll buy 1 - 3 SFHs every year until they build up a portfolio of however many they want, but if you want 20 units under management, it could take 10 years or more to get there. Now the more time and effort you put into buying up properties you could accelerate that progress quite a bit, but most people who are reading this aren’t full-time investors, and probably don’t want to be, so your time to scale will take a while.

2. Most will be self-managed or very expensive to manage: SFH investing at least in the beginning is not typically as passive of income as some think. If you want to hire a property manager for just a single unit, they typically are very expensive and in the 10% of gross rents range because they have to travel to a single unit instead of having the scale of a building. You could get this price down as you scale and hopefully scale multiple SFHs in the same neighborhood, but going back to scaling, it could take a bit longer. Which means you could be committing to managing your own SFH and answering leaky toilet calls.

3. Single source of income: We talked about this possibly being a benefit of SFH investing, but I wanted to talk about some of the downfalls of this. Having 1 tenant means if that tenant is great and stays for a long time your life will be easy, but if the tenant is difficult or causes a lot of problems, then 100% of your tenant base is causing you headaches. This also means if it takes a long time to turn the unit when it’s vacant that you could go longer without receiving any money but carrying the debt of the property. Having just 1 tenant could swing your investment in either of the two scenarios. 

4. Less opportunity for forced appreciation: Forced appreciation is appreciation that multifamily operators create by increasing the net operating income of a property either by increasing rents or decreasing expenses. When that net income increases, the value of the property increases, and because everybody buying multifamily properties is an investor, this income dictates the price. SFHs however have limited forced appreciation opportunities because SFHs are priced based on what similar homes in the area have sold for, not what the income produced by the property is. So even if you’re collecting great cash flow from the property, the price of the property when you sell it will still be based on neighborhood comparables. 

There’s pros and cons to investing in SFHs just like there’s pros and cons to any type of investment, it all just depends on what you want to accomplish and how comfortable you feel with different asset classes and investment types. 

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ABOUT THE AUTHOR

I connect smart investors like you to the very best multifamily investment opportunities available. I'm passionate about educating our investors in this space and helping you make the very best decision with your money.