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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43 CommentsLeave a Comment

  • Laura Agadoni

    Enjoyed reading this Jimmy! I’m on the single-family side. :)

  • David S

    This article by Jimmy Moncrief seemed like a good story…It was enough for me to check out his blog which offered a free report…However, when i submitted my e-mail address, all I got were invites to purchase other publications by him….Talk about a bait and switch!…now I’m worried about my e-mail addressed being sold to others.

    The folks at Cozy/Landlordology should be a little more careful about who they allow to write on their site.

    • Jimmy

      David

      Thanks for the comments about the article.

      Regarding my emails – there is an “unsubscribe” link on the bottom of everyone.

  • Dan Hunter

    I always tried to keep a good balance between single homes and multiples.
    I liked the singles and duplexes because when you sell, you are done with the situation. I always ended up holding paper when I sold multiples. And if the buyer defaults on the payments you must hire an atty. to foreclose. Then you have to rehab the property before you rerent the units. However you do make more money with the larger properties on a month to month basis and the young tenants never seem to have a problem getting mom and dad to cosign. This drastically reduces tenant abuse of property and bad debts and theft of stoves, refrigerators and even carpeting . And the money you make on the coin operated washers and dryers will pay for nice vacations.

  • Andrew

    Interesting story Jimmy, but it seemed to only lead me to more questions!

    You were getting $1,650 per month for the 3 units, what was your rent on the single family?

    With very similar acquisition costs between the multi and single family, my bet is that the 3 family spits out money, while the single family treads water…

    It may be EASIER to rent and maintain single families, but it’s also easier to stick the money in an REIT and take 3-5% with no work, but you won’t get the return of a good multifamily in the right area.

    • Jimmy Moncrief

      “it seemed to only lead me to more questions”

      THAT WAS THE POINT! :-)

      I didn’t want to come across as a “know it all” guru.

      I simply wanted to point out the positives and negatives of both and what I had learned investing in both.

      I was getting $800 a month on my sing-family rental. However, when I started renting it out I was only getting $600…

      • Andrew

        That means you were almost getting over 60% BETTER return on the multifamily, that’s huge!
        For real estate investors that should trump the extra issues encountered!

        The single family wasn’t even making money @ $600/month.

        One sentence in your article tells the real story: “…we actually ended up buying several more multifamily properties”

  • Usen

    If you have very little money, you should start with a multi family. Single leads in 5 categories, but the only thing that matters when starting out with very little money is cash flow, & it’s much harder for a multi to negative cash flow. Start with the biggest building you can afford 1st, but DON’T go over 5 units! 5 is ideal because it’s considered commercial, not residential. It’s also the most a rookie should subject themselves to. If you can’t find or afford a 5, then go ahead & get a 4, but it will be a little harder to sell. DON’T hire property management with multi family assets. Buy 1 or 2 to start & estimate how many you can handle. When you reach your limit switch to single family. Flip the singles buy & hold the multi.

    • Karl

      Usen – I just read your comments from last year which were thought-provoking. I am ready to buy a second real estate investment and am trying to decide between a single or multifamily property(s) to build a future retirement income stream. A couple of questions:
      Why do you suggest NOT hiring a property manager for the quad, which is exactly what I had intended to do since it would limit my headaches while producing greater cash flow.
      Also, I am not clear on why a 4 unit would be any more difficult to sell than a 5 unit – seems that they would be similarly difficult to sell since a smaller group of potential buyers (as opposed to a single family house). Thanks for your comments!

      • Usen

        Karl, Less headaches mean less money & more liability. Multi tenants are harder to deal with than single family tenants. I don’t trust someone else to do it. 4 unit is residential property. Whoever wants to buy will have to buy with residential loan. That means FHA first time buyer or 25% cash down + PITI. (principal, interest, taxes, insurance) 5 unit commercial buyer can get commercial loan. That means 5-20% down, often times no PITI. Single family sells much easier because everyone is looking to buy. multi family fellow investors are looking to buy. Investors are looking for a deal. If you have to sell residential multi consider financing the sale to remove the financing hurdles. Dodd Frank doesn’t apply to non owner occupants.

  • Eva

    I liked the article as I am about to choose my second investment property. The first one was a single-family home converted from a vacation property.

    My one comment is regarding the nifty little infographic at the end of the article. You awarded one or the other, depending on categories. “Financing cost” was lower at the multi-family properties, but the award went to the single-family category.

  • Snow Bunny

    Nice article and thank you for sharing. I am looking to re-fi my home and came about this article. Oddly enough, I found your story Intriguing and enough to read it through and to comment. This is a rarity!

    I hope you are doing well now and thank you again.

  • Crystal Carr

    I enjoyed reading this and have found myself in limbo on whether buying a single family home would be more beneficial for me over a multi family home. I’m new to this so I don’t want to be more overwhelmed than what I need to be…but I also want to make a profit sooner than later. I do have 1 question about purchasing a SF over a MF home…do I have to live in my home until it’s completely paid off before I can rent it out, or can I move out after 6months to a year and have them pay more than what I was paying and pay it off for me, while I live somewhere else? Is that even an option?

  • Ross Terry

    For the very savvy investors there is a 3rd option. It require just a little more capital but takes away all of the individual challenges, as you combine your investment with other real estate investors wanting to take advantage of the benefits of owning multifamily properties you can purchase properties that are significantly more expensive that carry much higher cash yields and added NOI through services to tenants (those are almost impossible to get from 5 unit MF properties). This is how the wealthy really put their money to work without having to work hard themselves.

  • Adam

    Right now I live in a an apartmnt paying 700 for 1 bedroom, I’m thinking to buy a duplex….. live in one side and rent the other side for 800, it’s 2 bedroom each side, what will I benefit if buy cash for 90k?

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  • Mike L

    Thanks, loved your article! I think this made a decision for my wife and I. We were thinking of buying a multi-family building to rent out/manage but now we’ll probably buy a single family home that we would downsize to and rent it out until then.

  • Hannah

    What’s your opinion on buying multi family and occupying a unit or two? My BFF and I are both swf 40 and have been recently blindsided by life. I have enough to get a modest home for myself and she probably would in 2-3 years but our retirement savings is low. I was thinking that a 4-6 unit property with us each living in our own might be the best thing for the next 5-10 years minimum. The tenants could pay the mortgage/taxes and we could allocate money for repairs and other costs. I’m in Austin. Also, how do you get a loan together without being related?

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    Excellent article!!!!

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  • Andy

    Interesting reading. I’m strongly considering doing what you did at first. We’ve been in our house ten years, will be moving soon, and I don’t need its equity when we move. My payments are pretty good and I’m finally starting to plow good money into the principal. If I can get a good renter in it, I’d end up with positive cash flow right away. I wouldn’t need to sell the house, and as I’ve maintained everything I know exactly its history and what maintenance it will require in upcoming years.

    Main issue in my scenario is it’s a “high end” house for renting; I know there won’t be much demand. Kind of far out and not a single house in my 80+ house neighborhood is a rental.

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    Jimmy:
    I really enjoyed reading about your earliest investment experiences. However, finding a starter single family property for $85,000 in the South Florida market is almost unheard of! What’s your advice for starting in a market that is higher than the national average when young people still have to come up with that 20 percent. Thanks.

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