My Experience Investing in Single Family Homes vs. Multifamily Housing

Written on September 10, 2015 by , updated on April 1, 2016

sfh-vs-mfShould you invest in single-family properties or multifamily properties?

Are you a visual-oriented person? Skip to the Infographic

This is a highly debated topic across any real estate related medium, whether it be in a forum on the internet, blog post comments, or at your local REIA.

Unlike others, instead of positioning myself as a “know-it-all guru” I like to confess my many mistakes online so you guys can hopefully learn from them.

I’ve been on both side of the argument for and against single family housing as an investment.

I have invested in both and now would like to show you some actual numbers, along with some other pertinent details about these investments.

My First Single Family House

jimmy-house

My wife and I bought our first house 1 year after we were married in 2003.  We bought it for $85,250.  The house was a cute 2 bedroom 1 bath bungalow with a nice flat backyard and screened-in porch.

We put 20% cash down (with money I made in college working, doing everything from serving in the Marine Corps to giving plasma and unloading trucks). We got a 15-year mortgage at 4.5% and our mortgage broker said “rates won’t ever be this low again.”

“Rates won’t ever be this low again.”

chart-fred

A couple of years after we bought it we moved into a slightly larger house because we were having a baby.  We honestly didn’t really think of selling it because we really loved it and it was going to be significantly easier (in our opinion anyway) to rent it than to sell it.

Additionally, we figured if being a landlord was a true nightmare experience (like you have inevitably heard) then we would sell it. This is when I realized that I shouldn’t critique a business, unless I own a similar business.

Don’t critique a business, unless you own a similar business

The first year renting our house out was crazy. We had a bunch of renters move out unexpectedly and we made $2,100 in lost deposits alone!

They didn’t damage the house and everybody paid on-time (seriously!).

This was all before we had kids and we made a lot of extra payments on our loan.

Today, this house is paid-off and rents for $800 a month. Unfortunately, after taxes (property and income) insurance and maintenance expenses it’s not as profitable as you would expect. Allow me to elaborate.

My First Multifamily

jimmy-mfh

For several years after college I would have lunch with a good friend and we would always dream up crazy business ideas. We are both very driven people and we both knew we didn’t want to be in our 30s or even 40s simply “talking” about business ideas.

We actually invested hundreds of hours trying to get a solar business off the ground but the ROI just wasn’t there.  Real estate wasn’t as “cool” of a business that we wanted to start but it got us off the ground.

I found an empty triplex in a very up-and-coming neighborhood.  A wholesaler had taken control of the property in probate court.  At this point, we didn’t even know what a real estate wholesaler was.

I think since this guy felt sorry for us he gave us 30 days.

We ended up buying the property for $85,500. Randomly this is obviously very close to the purchase price of my first house!  However, since the property had been empty for over a year and needed some major cosmetic updates we spent approximately $15,000.

We secured a pretty standard real estate investment loan putting down 20% in cash.  The loan was at 7% and was on a 20-year amortization.  This sounds high but we were just happy to get the loan!

Real numbers on my first investment:

  • Type: Triplex
  • Purchase Price: $85,500
  • Renovations: $15,000
  • Down Payment: $20,000
  • Loan: 20 year at 7%

Trials and Errors

I blog about this a lot on my personal blog, but we got turned down by several large banks even though we didn’t even need a loan!

If you have been turned down for a loan don’t let it bother you, it’s simply a part of the process.

It took two months to finish the renovations and we finished the day before Thanksgiving. Obviously not a lot of people move between Thanksgiving and the beginning of the year, so we had another learning lesson with getting the property renovated as quickly as possible to avoid this seasonality effect on getting your property rented.

The first unit that the person chose to rent was the one unit where we didn’t do any renovations. This says A LOT about me and my business partner and our renovation choices I guess! By the end of January we had all 3 units occupied with everyone paying $550 a month.

After 6 months we had to evict our first renter. We learned a lot managing this property for the first year and most years it was an absolute cash-cow as our payment was less than $600 and it remained fully occupied when we managed it. After a couple of years, we did a cash-out refinance at a lower rate and we got back all the money we had put into the property.

Even though it was a “cash-cow”, it was a lot of working dealing with tenants and getting it leased back up. We eventually decided to hire a property manager. Things went great at the start as it freed our time up and we actually ended up buying several more multifamily properties. However, as the property manager grew the service we got declined.

I would love to tell you that today the triplex is rented out for $800 a unit and is fully occupied – because on a neat little spreadsheet that’s what it should be doing. Unfortunately, we have dealt with a ton of issues including a failed sale, a horrible property manager and maintenance issues due to bad tenants.

I’m hopeful that things will improve though as we have a new property manager and a lot of rental interest.

Summary

Regardless of what you choose to invest in, know your numbers inside and out. I’m a finance geek that makes spreadsheets just for fun!

It’s a personal decision whether you choose to invest in Single Family or Multifamily housing.

Personally, I was caught off guard at the large cash expenses with multifamily properties due to turnover. Additionally, I was surprised at how much longer it took multifamily properties to get rented than it does single family properties.

I highly encourage you to go read through the guides below, and enjoy the infographic I created to help you to become a better educated real estate investor.

Related:

Infographic: Single Family vs. Multifamily

Single Family vs Multifamily

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40 CommentsLeave a Comment

  • Richard

    When I first began in R/E, i owned a 4-flat which showed good income, if all tenants paid and/or paid timely; they did not. I will soon invest again, but this time I will research and invest in best markets for S/F homes, and buy multiple homes with as small a mortgage as I can afford in order to maximize profit. Decent cash flow, low turnover, and price appreciation seems to be the best business plan for me.

  • Kelly

    I have a multi level home currently on 5 acres. The home has two total living both have master bedroom full kitchens, very nice place. We are considering building another home on this property and wondered if it would raise the value or decrease the value?

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