Epic Real Estate Investing - Single Family vs. Multi Family | HTH 016 | 534

Episode Date: December 5, 2018

Single and multi family properties, both come along with their challenges but as long as you understand what those challenges are and how they affect you, you can manage them and mitigate the risk. Learn what makes single-family stable and consistent, how you come to the value of a multi family property, and how the cost of repair and maintenance of single family compares to the same costs of multi family. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Hold That House, baby. Flipping houses can make you rich. But holding them that's going to make you wealthy. This is that Hold That House show. I am Matt Terrio, and over there is Mr. Matt Andrews. That's me. That's him. And before we begin, we've got a free gift just for you.

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All right. Matt. Cool, cool. What are we talking about today? Today we are talking about two things that we like a lot, single family homes and multifamily properties. And really, you know, not really which one's better, but what are the pros and cons of each?

Right. You know, you and I both own single-family homes. We like them a lot. Yep. We also both own multifamily properties, and we like them a lot. Yes, we do. You know, what are the good and what is the bad about both of those? Let's break it down.

Okay. So, first of all, I think a complete real estate investing portfolio should be diversified. Yes. You should have both. Absolutely. And there are reasons for both because there are pros to both and there are cons to both. Sure. Okay.

So here's, I'll kind of share with you what I think the pros and cons are. And then if you can add anything to that, you know. I'll just jump in as you're doing it. Just jump in. Sure. It's your show too, bud. Yeah, man. Okay.

Matt and Matt. Here we are. All righty. So single family homes. I like them because they're more readily available. So I don't have to wait for the multifamily opportunities to arise. I like them because they're more easily accessible. Yep.

And they lend themselves to more creative ways of acquisitions, which I love. Yeah. In the right markets, they certainly can cash flow just as good as multifamilies. and what's the other thing I was just thinking about, oh, you're, you, even though I don't invest in it for and look for appreciation, you have the potential of that upside. Absolutely. And if you purchase them right for cash flow, you really mitigate the downside. Because who cares what the property is worth?

You're not going to sell it anyway. Right. So you get to cash flow. If the market goes up and down and it certainly will. It'll continue to do that. That cycle will probably never end. and when it's at a low point, lower than what you paid for it,

you're still cash flowing the property. Absolutely. And when you do appreciate, you can leverage that appreciation, you can leverage that equity out to help that house can actually help build your portfolio. Sure, there are a lot more financing options

available for single family homes. That's one of the things I had down to. For sure. Absolutely. And more creative strategies available for it too. You know, another thing, just from a real surface standpoint,

you know, you're only dealing with one tenant. So that's obviously going to be easier than dealing with a duplex or a triplex or a big apartment complex, you know. Now you get benefits for dealing with more people, obviously, but that's simple. It's pretty easy. And for those of you that are doing-it-yourself landlords or those of you that are just starting out, your real estate startups right now, single-family home is a great way to cut your teeth, you know, and learn if you're going to be the manager, if you're going to be the property manager, it's way better to learn with one tenant than like 50.

This is true. You know, so that's, you know, lower barrier to entry. And then the other thing I like, and you kind of touched on this, I feel like there are more exit strategies for a single family home. There you know. A little bit more liquid. A little bit more liquid. And I think, you know, you buy a single family home and, you know, you and hold them for the long term because that's what creates wealth. But if you wanted to sell that, you know, or if you decided, hey, I've got an opportunity to buy some other properties over here that are even better. So I'm going to sell these properties. Who can you sell it to? Well, a single family home, you can sell it to. an owner-occupant, somebody who wants to buy that house, move into it, live in it, right? And you can sell it to an investor. Correct. Right.

So, I mean, that's what you're doing with us. So you can sell it to another investor. So those are two exit strategies that you have on it. And underneath those strategies, a number of other ways you can, you know, divest that property, too. So that's something you don't always have the options in with multifamily. True. Right.

So, you know, there's usually one buyer. If you're selling a big apartment complex, who's that buyer? It's an investor or an investment firm, something like that. So there are more exit strategies in single-family homes, and I don't necessarily believe this is true across the board, but sometimes you will get a higher caliber of renter in a single-family home than you might in a 2-1 apartment or something like that, right? Not always, but more stability a lot of times.

It's a broad rule of thumb. Yeah, sure. And families are much more likely to move into a single-family home and stay long-term than a family who's kind of in transition who's in some two-bedroom apartment somewhere. So I think in certain markets especially, you do have a little bit more consistency with your renter there. And those are definitely the pros.

Now there's some cons to single-family homes too, right? There are. So, you know, one is you have a higher vacancy liability. True. So. Well, in the beginning. Yeah. In the beginning.

Because that's very true. You know, you have one property, the one-tenant goes out. Now you've got to foot the bill for the property until you find it. You're 100% vacant. You're 100% vacant. Right. So yeah, you have that in the beginning. But as your portfolio grows, now you can spread out that risk, so to speak, that vacancy risk over multiple properties. Sure. So if you have 10 single family homes and one goes vacant, ah, it's not that big of a deal. But you do have that in building. So that's accurate. But it's not as a, that tends to be a hard and fast rule for people like, gosh, if it goes vacant, then I don't want to make money.

Then you're losing all your money. Well, you're only looking at one property. You're not looking at your portfolio. If you're scaling up like you should, using the information that we're giving you in this podcast, you should have many units. And so it should, you know, essentially your pool of single family homes should be like a multifamily property anyway.

But until it is, yeah, you have that higher vacancy liability. The other, one of the other cons, I think, about two, and it certainly hasn't kept me away from doing lots of single family homes because I love them. But, you know, you don't have control necessarily over the neighbors or over who might move in next to. your properties or whatever, whereas if you own an apartment complex or a duplex or a triplex or quad, something like that, you do have some element of control of who moves into that next door unit, you know, and you have an ability to kind of affect some change there, you know, but if you

buy a rental property, it could be the best rental property in the world. If, you know, the Adams family moves in next door to you and starts freaking out all the neighbors, there's not much you can do about that. Right. You know, if they're not breaking the law or they're not doing anything, they're just, you know, bad neighbors. You don't have control over that in a single family home. situation like you might in a multifamily, right? Thanks for sitting tight while we pay our light bill. We'll be back right after this. If waiting for your investments to grow feels like waiting for pink to drive,

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For the secret your financial planner doesn't want you to know, go to turnkeyallies.com. That's turnkey allies.com. One thing that I've learned with the single families as far as a con goes is when it comes to maintenance and repairs. That, you know, to fix a water main going into a single family, cost the exact same as fixing a water main going into a multifamily. Sure. But you only have the income from the single family to cover that. So, I mean, it's a $3,500 fix. ask me how I know how much it is

because I've had it happen in both single families and multifanilies. So my multi-family that cost can be distributed over the multiple units on the single family, not so much. And then another example would be a roof. You know, certainly the roof is a lot bigger on a multifamily, but you know, it's kind of like printing. You know, you can get 500 business cards for 90 bucks

or you can get 1,000 for 110. Right. And that roof kind of works the same way. You can distribute that cost over multiple units. Absolutely. A lot of times you're paying so much just for the people to get them out there and get the materials out there. Absolutely right. So the expenses can, you know, be very overwhelming on a single family. Sure.

And it can increase your cost basis rather quickly. Absolutely. But that's a good tradeoff for me in the potential for appreciation. Yep. Right? Because if the market goes up, you want to benefit from that. Absolutely. It's not like I don't like appreciation.

I don't bank off. on it, but I know it's going to happen. It might happen six months, might happen in six years. I don't know. And it doesn't matter to me that much because I'm going to cash flow along the way anyway, but I know it's going to happen. So I want to benefit from that. Absolutely.

If you can have the appreciation along with great cash flow, we want both, right? Exactly. If we chose one over the other, it would be cash flow. Right. But we really want both. We do want both. That's the idea. Absolutely.

Absolutely. For sure. So that's the other big con around single families is when it comes to maintenance for me that that I've experienced several times in the hard way. But, you know, I'm going to get it all back. I don't plan on selling the house. I'm not going to sell at a loss. I'm not walking away from the crap table while I'm down.

That's right. That's right. The cash flow allows me to keep on rolling the dice. Absolutely. It allows me to stay there. And like you said, you've grown that portfolio. So it's not like you're sitting there with one single family home and that's your pretty little pet, you know?

Right. And that's what happens with a lot of beginner real estate investors, too, where people that are just, you know, in their startup phase and they've got one or two properties. Something goes wrong on that one property. and that's your pretty little pet. You know, and oh, no, now everything's falling apart, you know. Whereas if you own five properties or 10 properties or 50 properties and something goes wrong on

one property, it's barely a blip on the radar at that point, right? So, you know, it all changes as you grow the business and as you scale up, things that seemed huge, gigantic because you were looking at one tiny little sample size. Many of those things disappear or almost become absorbed into the portfolio once you grow and scale up the business. Absolutely. So let's talk about multifamily. Okay.

Pros on multifamily. You like some multifamily. I do. And what I like about multifamily is, and one of the biggest distinctions between a single family and a multifamily, why they're different, has to do with how their value is, how you come to their value of the property. You know, a single family is really valued or its value is determined by comparable sales in the area. You know, it's very easy to compare apples to apples for a single family. When you get into multifamily, you don't have it. You got apples and tomatoes and oranges and pineapples and bananas out there.

That's true. So how a multifamily is really evaluated is based off of the amount of income it produces. And so the reason I like the multifamily is because you can control that income. And based off the cap rate in the area, if you can sway that multifamily a couple hundred bucks a month, you know, based on the cap rate and how that's evaluated, it's multiplied into the value. So, you know, increasing the rent, say, $25 per property or per unit can be a swing of $20, $30, $40,000 in your sales price. Huge. And a big bump in your return on investment.

Absolutely. Absolutely. So if you can manage the expenses, you can find a property that's underperforming. You can force the appreciation on it as soon as you take over. If you find a property where they're paying just way too much on maintenance and you can negotiate the trash bill down and you can negotiate the water bill down, maybe you can pass on some of those expenses to your tenants, that has a major impact on the value of the property.

If you can implement, say, take out one of your bedrooms and make it into a laundry room, or one of your units make it into a laundry room, you have to do the analysis on that, of course. Sure. But that property is producing income. Sure. Okay?

Or you take, you know, you put in a soda machine, and that property is now producing an additional income. You rent out the top to a cell phone tower. That property is producing additional income. Or you have a big enough lot and you go ahead and you build storage units on the back. And you rent those out to the tenants. It's producing additional income. You don't have that type of flexibility and that type.

You don't have access to that type of creativity with single families. Right. And this is where you can actually force appreciation on your multifamily just by causing it to produce more and cost you less. Exactly. Exactly. And that's how you increase the value. Right. And you and I know a lot of people, and we've done this too, that go into,

apartments, you know, specifically looking for underperforming apartments just so they can change the value of it by increasing rents and changing a few of those key, key items, right? And you increase the value of it tremendously and then boom, they sell it, you know? And now we want to hold it. We'll hold it long term. We'll sell it, you know, maybe way down the road or maybe never. But if you force the appreciation on there and it is valued more, it just lends it to a perfect situation for a refinance of where you can extract cash out of that and go purchase another one. Bring the leverage. Absolutely.

Absolutely. So it gives you more ability to go out and get that leverage. That's great. Another thing I like about multifamilies is because I started my business on a lot of duplexes in central Florida. And some of the duplexes I had were, you know, side by side. So I'd have like, you know, three duplexes in a row, six units, you know. And that kind of gives you a little bit of, you know, economy of scale. You know, more units equals the ability to kind of batch more tasks, you know.

So I might have, you know, some work that needs to be done. a single family home and you just go and get the work done. Sometimes when time comes to get worked on some of those multi-family units, you can do it all at the same time. Have one person do it all. Like, hey, we're replacing the roofs on all of these units right now, you know? And so you're going to save money. There's the maintenance issue again. Yeah, bringing in a roofer and doing all those, right? You also have the ability depending on the size of your multifamily, like some of these big apartment complexes that you own, you know, you can actually, in the same thing, you can actually, in some cases bring in a manager just for that apartment complex, right?

Who was 100% responsible just for those properties. So it's a hyper-focused property manager. And somebody like that, that's the right person, can really help you raise the value of that property by making those changes and implementing those things. So, you know, I think more units equals more batching of tasks, better maintenance prices, and then you save money in the long run there.

So definitely like the economy of scale, you know, ability that you have there in multi-families. And then, and you kind of mentioned this, but, you know, just less vacancy liability. Right. You know? So with your very first property. Yeah. Exactly.

With your very first property. So if you got even a duplex versus a single-family home and that's your first property, well, you've cut your vacancy liability in half. Right. Right. So, you know, there's a lot to think. And so, again, more units equals less of a lot of different things. Right.

Less money on maintenance. Less vacancy liability. And so, you know, again, once you start scaling up, growing your portfolio, whether that's full of single-family homes or multi-families or a mix, a lot of those problems disappear. Right. You know, so for those of you that aren't there yet, we want to help you make those problems disappear. That's why we make this podcast, right?

Because a lot of those problems that really bugged Matt and I in the beginning of our careers, we don't even think about those things anymore. Right. Because once you grow to a certain size, a lot of that stuff disappears. Or, like I said, kind of gets absorbed. Right. You know, and that's a great position at B.N. Right.

And not losing sleep over that stuff anymore. No, uh-uh. Not at all. Not at all. So I think really the bottom line is they're both good. Absolutely. So do you do multifamily or single family? The answer is yes.

Yes. Right. Yes, we do. Yes, we do. And there's a reason to have both in your portfolio. And, you know, they're both good. They both have tremendous upside. They're both real estate.

And, you know, they both have come along with their challenges. But as long as you understand how those challenges are and how they affect you, you can manage those challenges. And you can mitigate that risk. That's it. So that's it for today. flipping houses, that can make you rich. Flipping multifamilys can make you rich too, but holding them will make you wealthy.

And so we'll be back. We'll be back next week to share more goodness over here. Until then, remember, don't wait to buy real estate, buy real estate, and wait. Hold that house. Contrary to popular belief, a lack of funding is not the biggest barrier to starting a business.

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