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Single-Family vs. Multiple-Family Investments

Friday, June 13th, 2008

In my mind I have gone back and forth a little bit about which to invest in, single-family homes or multi-family homes. I know there are pros and cons to each and the answer will be different for each investor, but I thought I would discuss it here a little bit and see if I can get some opinions in the comments.

I’ve always envisioned myself as either the owner of a large apartment complex or of dozens of single family or 3-4 unit buildings. Obviously, I would expect to have people working for me, taking care of maintenance, collecting rent, etc. But since I am just starting out, I’m wondering if maybe it would be a good idea to start with a single-family home and then build up from there.

Maintenance

There are many reasons that I would prefer a multi-unit property, such as a fourplex, but there also one or two reasons that I’m considering a single-family. Multi-unit properties offer many benefits to an investor. These properties are generally built for lower maintenance. They are built with basic supplies and nothing fancy or expensive for when replacement or repair is needed. For example, a fourplex we looked at recently had all of the plumbing for the bathrooms and kitchens in the same shared wall which would make repairs simpler. From the bathroom fixtures to kitchen cabinets, everything in these units was something that you could inexpensively pick up at the local home improvement store. Also, you can replicate the same items and design in each unit. When someone moves out, you don’t have to go looking for the paint that you used for that specific unit if you use the same throughout the building. In general, the maintenance will be more consistent.

Income

When it comes to income, there are several advantages as well. A multi-unit property offers more bang for the buck. I may be able to buy a 4,000 square foot fourplex for $200,000 with each unit renting for $700. If I bought 4 single family homes for $100,000 each, I may not get any more income despite doubling my purchase price. Let’s say I can only afford to spend $200,000, so I opt to buy two single family homes. If I had purchased the fourplex, then a vacancy will only cut my income by 25%, but with the two houses, it would be cut in half. That could hurt…a lot.

Neighborhood

Often a multi-family home is surrounded by other multi-family homes. Although this could be seen as a negative, at least those who are looking for a rental will be more likely to look in your area.

Appreciation

Lastly, as the credit crunch and falling house prices have taught us, multi-unit properties may be a better investment for stable appreciation at least in the short run.

Now I turn my attention to single family homes which have many advantages in their own right.

Ease of Entry

Maybe one of the easiest ways to get into owning rentals is to rent out the house that you are moving out of. If you’re a young married couple and are planning on moving up to a larger house, then hold onto your old house for a couple of years and rent it out. This takes the hassle out of searching for that perfect rental property, plus you’ve already paid down the principal a bit.

Affordability

Single family homes are also more affordable. In my example above, I said I had $200,000 to invest. What if I only had access to $100,000? My only option would be to get more money, or buy a single family home instead. Also, single-family home prices fluctuate more. It may be easier to pick up a bargain during a downturn in the economy. Multi-family properties are almost always priced based upon the rental income they bring in, so the prices do not fluctuate as greatly. This can also lead to a potential higher appreciation with single-family homes. Just like the stock market, the prices go up and down, but there is more volatility to take advantage of.

Easier to Market

Probably the biggest advantage I can think of though is the fact that if given the choice, many people would prefer to live in a house rather than a unit. Although I praised the simplicity of units above, some people actually do care where they live and the quality of the surroundings. This can bring you happier tenants and bring them to you quicker.

Less Competition

Since single-family houses are not generally in neighborhoods with multi-family units, there will be less rental competition in the area. People won’t be comparing prices with the unit next door like they might be in a rental neighborhood. But just remember, this also means that you have to find creative ways to advertise.

All in all, I think any residential property is a great investment. It all comes down to personal situations and circumstances.

Please let me know if you think of any other pros and cons that I didn’t come up with.

Photo courtesy of dave_mcmt via Flickr.

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Return on Investment: How much is enough

Tuesday, June 10th, 2008

When I thought about the term “Return on Investment” or ROI, for some reason I thought about lottery tickets. Investing is a lot like a lottery ticket. If you buy enough, you’re probably going to get a return, but you just don’t know for sure how much. Now hopefully your returns on investments are a little more secure than a lottery ticket, but in a way, they are similar.

(Personal Anecdote - Skip if you only care about true investments)
One day, when I was in another part of town waiting for some family members to meet me, I stopped at the gas station. The two customers in front of me both bought scratch-off lottery tickets. When in Rome…plus I was bored, so I plunked down a five dollar bill and asked for five $1.00 tickets. I returned to my car and scratched them all, excitedly to find that I had won two free tickets. I went back inside and the clerk asked if I wanted tickets or the $2.00 back. I decided to press my luck. Being sure that I would win again, I stayed inside to scratch these two tickets. Unfortunately, I cut my winnings in half and was only able to get one more ticket. This single ticket ended the fun. The five minutes of diversion was probably not worth $5.00, but it reminded me why I don’t buy lottery tickets. As a sidenote, this was a lower income neighborhood. Nothing against those who don’t make as much as others, but I have noticed that many in these neighborhoods are very uneducated when it comes to money. I wouldn’t be surprised if the people in front of me buy a few tickets every time they fill up or possibly every day. Those few dollars would add up to more than they can imagine over the months and years.

(Resume Investment Discussion)
So how much return on investment is enough when it comes to rental properties? Many people say not to worry so much about the cash flow as long as you are covering your expenses. They say that the many benefits of rental properties will outweigh the meager money entering your pocket on a month-to-month basis. As a reminder, the four benefits of rental are:

Cash Flow
Principal Reduction
Tax Benefits/Depreciation
Appreciation

I appreciate the four benefits, but in my properties, I’d like to concentrate on number 1 and let the rest be gravy, for a possible early retirement down the road. I’d rather be pleasantly surprised when I look at my finances in 10 years instead of looking and finding that I haven’t made as much as I hoped from appreciation. Ideally, I’d like to make back my out-of-pocket money within a few years and then start pulling a profit from then on. Obviously that is a huge return on investment and not the easiest thing to find, but I think it’s possible. Let’s look at an example. The following are using assumed numbers, so let me know if you think they’re inaccurate. I’m always willing to learn from the experience of others. Let’s buy a $100,000 property with 10% down and a 7% traditional 30-year mortgage (it could still happen, right?). Let’s assume that the rent is $1,200 a month. I think these numbers would be more attainable on a multi-family home than on a single family. Here is my breakdown:

Rent:       $1,200
Loan:         - $599
Taxes:             - $87
Insurance:       - $54
Repairs:           - $72
Vacancies:       - $96
Management: - $146
Potential Profit: $146 (per month)

Initial Investment: $10,000
Years for return: 5.7 ($10,000 / ($146*12))

As I had said previously, ideally, I would like to get paid back a little quicker than this, but still not bad. What is a good ROI for you?

Photo courtesy of midweekpost via Flickr.

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