Recently, I was asked by a newbie real estate investor, “Is it better to invest in single family residences or multi-unit apartment buildings?” He wasn’t the first person I’ve heard ask this; it’s a pretty common question.
I think back to when I was a newer investor who was scraping and saving for that first rental property, and I remember thinking that multi-unit apartments were probably best, largely due to the idea that if one of my units went vacant, then I could still have the rent from the other unit or units. Besides, wouldn’t things be simpler if all my units were under one roof and in one location?
It wasn’t until years later, after having owned and managed both, that I really understood the answer to the question, “Which one is better?”
Download Your FREE copy of ‘How to Rent Your House!
Renting your house is a great way to enter the world of real estate investing, but most first-timers (understandably) have a lot of questions. Fortunately, the experts at Szikov have put together a complimentary guide on ‘How to Rent Your House’. All the skills, tools, and confidence you need to successfully rent your house are just a mouse-click away.
Let’s face it, the real answer depends on several factors, such as timing, financing, risk tolerance, number of units, experience level, and whether or not you’re trying to buy the property owner-occupied.
If we break it down, when I was new, my risk tolerance was pretty conservative, especially since I had limited capital reserves and my experience level wasn’t very developed yet. But I was also an owner-occupant, as well as a real estate agent getting a commission on the deal. Also, the financing was definitely favorable, as I wasn’t being chastised by the bank for the number of units I owned since this was my first building.
It was part of my plan that this property was a stepping stone into something else and that one day this unit of mine would be just another rental. It was all about affordability since I wanted to save some money for the next château.
It wasn’t until I owned several duplexes, a triplex, six-unit, and many, many single-family residential units that I realized some of the differences — most of which were bottom line items, like turnover rates and aggravation. For example, once you have a larger portfolio, a vacancy is a vacancy, and the fear of having a vacant single-family residential unit goes away, especially when you have adequate reserves.
To be quite honest, I usually make more money on single-family residential units due to the fact that my tenant turnover is lower. With houses, the tenants tend to stay longer than with apartments. They usually have fewer complaints about any neighboring tenants as well.
In fact, I have a very good buddy who had a lot of single-family units, and his dad had 52 apartment units in three buildings, and we always joked about how much more money he was making than his father.
Maintenance and Repairs
Some similar advantages of single-family residential properties are that the tenants usually take care of the lawn, the snow, the water bill, minor repairs up to a certain amount, and the heater contract — and you don’t have things like common areas like you do in an apartment. There’s no hallways, laundries, stairwells, shared utilities, trash dumpsters, and landscaping bills.
So, why do so many investors like multi-units?
Ideal Number of Units
If the investor acquires a larger number of units, the costs associated with multi-unit apartment buildings may not cut into their cash flow as much as if they owned less.
For example, years ago when I was a painting contractor who did many apartment complexes from 50 to over 500 units, I started to see a pattern. With larger complexes, especially those with over 100 units, the owner had enough scale to justify on-site maintenance and management.
Oftentimes, key people receive a unit to live in as part of their compensation package, which makes it much easier for the owner to have 24-hour emergency service since the maintenance person would live there — or to collect rent since the manager would be there on site as well.
How You Buy
Another big factor for whether or not investing in multi-units makes sense is how you buy.
I know my good friend, Brian Adams, buys many apartment complexes using private placement offerings (and other people’s money), just like I did when buying mobile home parks and storage centers. It’s a great model when you can purchase a couple hundred units with 80 percent bank financing, and you can raise private equity for the remaining 20 percent, plus closing costs, plus any renovation capital that you may need.
Then over the next 3-5 years, Brian works towards improving the property by remodeling units, increasing occupancy and hopefully raising rents, so that in a few years he’s able to refinance and pay off all of the initial investors, while gaining 100 percent ownership of the apartment complex.
As you can see, a lot depends on the scale of multi-units you’re buying, but you can also see where financing and experience level come in.
So, those of you on Szikov, which do you prefer — single-family residential or multi-unit apartment buildings?
Let me know with a comment!