7 Advantages of Multi-family Over Single-family Rentals
John Larson and the Real Estate Cowboys talk passive income real estate investing.
Hear new episodes every Sunday morning at 8 a.m. The Cowboys talk about the advantages of multi-family over single-family rentals in the current market.
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Keith Weinhold: Hey, this is Keith Weinhold from the Get Rich Education podcast. You are listening to my friend John Larson and the Real Estate Cowboys. Don’t quit your daydream.
Robert Helms: Hey everybody, it’s Robert Helms, host of the Real Estate Guys radio show, and you are listening to the Real Estate Cowboys.
Announcer: Have you thought about becoming financially free through real estate investing, but don’t have the time or knowledge to get started? Welcome to the Real Estate Cowboys podcast. Each week we discuss passive income investment opportunities in the red hot Texas market. John Larson and the Real Estate Cowboys will show you how to leverage their team to build wealth in real estate through passive investment opportunities. And now here’s John.
John Larson: Hello everyone, and welcome back to the Real Estate Cowboys podcast. This is your host, John Larson. As many of you know, um, I’m a big, big advocate of single-family rentals, but with the market today, single-family rentals may not be hitting all of your investment goals and needs. And if you’re primarily looking for cash flow, it’s really, really tough to find good cash-flowing single-family homes right now, especially in markets like DFW, Austin, San Antonio, Houston; you know, many of the major metros where there’s a lot, uh, you know, a very strong economy and you know, a healthy real estate market, probably out there finding that it’s, it’s tougher to find good deals that are checking all the boxes. So, you know, we talk a lot about private lending here for, uh, you know, cash flow for the investors who are really cash-flow centric. Private lending can help you get there, especially if you’re investing out of a self-directed retirement account because those dividends are coming back to you tax-free or tax-deferred.
But if you still like the idea of owning property, um, and taking advantage of all the tax benefits that are available to you too, and you’re looking to invest with cash. So with cash, you know, obviously you want to take advantage of all the great write-offs that are available to you. Um, with real estate, the main one being depreciation, bonus depreciation, writing off your interest payments. You know, most of you are looking to get some sort of finance to acquire these properties. So the interest payments is obviously tax deductible, maintenance, and repairs, uh, paying for property management. All this is is a write off for you; traveling to go see your property, um, checking on it, things of that nature. So lots and lots of tax benefits that are available to you so you can maximize your cash flow. But I want to talk today about multifamily over single family.
I’ve had shows where I talked about how single family was better than multifamily in certain aspects. Obviously with single-family homes, if you buy them at the right time. I just don’t know if right now is the right time because I believe we’re kind of, we’re back at the top of the market. I don’t think that it can go much higher from here. Um, you’re starting to see in certain areas where buying a rental makes sense. Even A class rental, uh, the property values have risen to a point where it’s kind of driving out the demographic who would actually want to live in these neighborhoods because the prices are getting too high that that certain demographic can’t even afford to buy a single family home in that area. So I’m starting to see prices plateau. Maybe come back down a little bit. We’ll see how this summer goes. But either way, the prices themselves, if they keep rising, it’s going to keep choking cash-flow out. Okay. But how do you beat that system? How do you trick that system? How do you still acquire real estate and take advantage of all the tax benefits, but still see positive cash-flow? We do with multifamily now, multifamily deals are also very hard to come by. Good cash flow, good cap rates, especially when you want to buy in good markets or good neighborhoods. Multifamily can, um, you know, obviously be a little bit more of a expensive investment purchase. You’re not buying one single family home. You’re buying multiple. You’re buying two units, four units, six units, a small apartment complex, 30 units, 50 units or more. So that’s something that probably is, you know, geared towards more of a sophisticated investor.
One, one who’s already started with single family, grew a single family portfolio and kind of graduating on from that. Like we talked to Al Beahn, at Pioneer Homes a couple of weeks back. My, my good friend who runs Pioneer Homes in his primarily done single-family rentals in the Detroit, in Metro Detroit area for years. He’s even transitioning to multifamily because even the property prices in the Detroit area and Metro Detroit area have risen greatly. So he’s getting over to the multifamily side as of we and American Real Estate Investments. We followed that same path. And I’m also purchasing commercial properties. I love commercial office buildings also. But I wanted to talk about the advantages of multifamily over single family now because I think in the year 2019 and beyond until the market comes back and starts correcting itself, which I believe will happen. I’m hearing about more layoffs with Ford.
Um, and you know, when you, when you see certain, you know, sectors of our economy, and the automotive industry is a big one. You know, GM was talking about layoffs. Ford’s now talk about layoffs. They’re cutting back on a lot of them, the car lines that they’re producing. That’s going to have a negative effect and a ripple effect when it comes to the housing market as well. You’re going to see more houses start going into foreclosure, um, which will cause pricing to go back down and kind of correct itself. You know, and then at that point, and I’m sure it will have an impact on our economy to where getting a loan, interest rates might fluctuate and go up again, uh, that might start…market does start to correct itself. And then if you buy those properties at the right price, that appreciation wave, and many of my investors who started buying properties from us back to were sold and then taking that money and moved it into a strategy or private lending, single-family rentals, they’re great.
Um, but I think the most attractive thing about single-family rentals is your opportunity to capture appreciation and then do a cash-out refi, which is nontaxable and roll it into another investment. Those days are and have been kind of coming to an end. So if you’re looking to scale up your real estate investment portfolio, you might want to take a look at multifamily. Okay. Single-family rentals can be lucrative. But like I said, in today’s market, it’s harder and harder to find cash flowing single-family rentals. It just is. And it’s hard to find deals with some meat on the bone that you feel like can continue to appreciate at the rate that we’ve been seeing over the past five, six, seven, eight years.
Okay. I do like I said, I believe there’s even certain parts of Dallas where I’ve seen pricing start to plateau, start to come back down a little bit because I believe the demographic, the true middle-class person who’s looking to purchase a home in these areas, they can’t afford it. Okay. Apart from, you know, the reason that it’s hard to find good cash flowing, single-family rentals, multifamily rentals also offer a lot of advantages over single-family rentals that are hard to pass up. You know? And, and like I said, multifamily could consist of a duplex, a triplex, a four-plex apartment building, townhouses or mixed-use buildings. Okay. There’s a lot of ways. The duplex is considered multifamily and a duplex is great because you’re bringing in two revenues, right? So in a market like Dallas where the property taxes are high, you have a duplex, it’s sitting on one parcel of land, right?
Just like a single family home would. But it’s generating two incomes. That’s one way to kind of trick the system in a market like Dallas where you have high property tax. Okay. If you have just one building on one parcel like we’re doing with these four-plexes right now. I have one building on one parcel, but then I have four incomes coming in. That’s how I’m able to get my investors a higher cap rate. Right. One of the reasons why people like multifamily and commercial and things like that is, is a lot of people say they’re easier to fund. Lenders for multifamily properties are often easier to deal with than lenders for single-family rentals. And that’s true because in most cases the lenders are underwriting the property itself, the cash flow of the property and not so much, you know, your personal credit or you know, it’s kind of almost like more of a nonrecourse structure.
Um, so if you have a good property that’s cash flowing at a good rate, the bank should be more willing and able to fund that deal. Right? So four units or less can qualify as residential lending. You can still get a Fannie Mae loan, which will get you that 30-year term, which with commercial lending you’re not going to really see a 30-year term. You’re gonna see more of like a 20 to 25 year. I’ve, I’ve never seen a 30 year, I’ve heard some, some lenders out there talk about a 30-year term on a commercial loan. Maybe, but I’ve never seen it and it seems like every time I get down the underwriting process, 20 or 25 years is the max that they can offer. But if it’s four units or more than you’re going to have to start getting into more of like a commercial type loan.
But that’s why I think a lot of investors love that. That four-plex, cause that’s the sweet spot. That’s where you can still get the 80% or 75% I believe it is on a four-plex, loan-to-value. Okay. So you’re only bringing in 25% to the table and you’re still getting a solid rate. Probably the lowest rate that you’re going to get. Commercial loans, you’re probably going to be a half, half a point above whatever Fannie Mae’s offering. Okay. So if Fannie Mae’s offering 5%, um, you’re probably gonna be closer to five and a half on a commercial loan. Not too much of a difference. But when you factor in the fact that it’s a shorter term, so now your principle and interest payment’s going to be larger, right? Uh, the payments aren’t deferred out as long. You lose five years or 10 years. Um, and then the heightened half a point on the rate could have a negative effect on the cash flow, right? And the return. But when you’re at four units or more you’re going to have to start looking for more alternative finance and commercial loans.
Conventional loan is suitable for up to four units. So a Fannie Mae loan, a government-backed loan is suitable for owner occupant properties with two to four units or investor property with five or more units. Okay. A portfolio loan could work for something like this for multifamily, or a short term loan is obviously for fix and flippers buying a distressed property. So you have a lot of people, especially in the Dallas market right now, this is a lucrative model; buying a distressed, small apartment complex, renovating the entire exterior, enhancing the common areas, painting, rebranding under a new name, putting a new management company, and a more professional management company. Because a lot of times these things are just completely mismanaged, which is why they’re failing.
Um, and they’re also, you know, the owners aren’t renovating them, keeping up with today’s standards, making sure that the units are more appealing to tenants. Um, and in that case then you have to start renting the properties below market value to get tenants to come in and rent them from you. Right? And that’s where kind of things start to go in a downward spiral. And then, but that gives us as investors a great opportunity to come in and buy a complex like that, renovate half the units, renovate the entire exterior, rebrand it, put in a new management company and flip it back on the market to another investor who’s looking for a buy and hold opportunity. And you can then show through a pro forma what you’ve done to the building show that you’ve brought up half the rents to market value on half the units and leave a little bit of meat on the bone for another investment group to come in and finish it off and hold that property as just a good cash flowing, um, opportunity for their portfolio.
Okay. Another reason why multifamily properties are, I guess better than single-family homes and Al and I also talked about this a couple of weeks ago, is they’re easier to manage. It’s easier to manage eight units in one building than it is to manage eight single-family homes spread out over the country or over even a city. Right? Uh, the logistics of keeping track of multiple properties is just a lot more, and that’s true. Imagine you could own a 50-unit apartment building that’s just, you know, 10 miles from your home or you can own 50 single-family homes that are spread out all over the metro that you live in. Or even worse, they’re in multiple states across the country. You have multiple property managers looking after these properties, you don’t really have one direct point of contact. Um, and so, you know, just driving around, the logistics of checking on these homes is a lot tougher than just having 50 units in one area that you just have to drive to one place and check on all the units.
Okay? Every property will have its own unique set of conditions. Okay. You need to keep track of the appliances in each property, any warranties, any ongoing issues. How old are the systems, when do the systems need maintenance, et cetera? That’s a lot of things you have to keep track of with single-family homes. And when they’re spread out over a geographical location, it’s tougher to keep your eyes on all those things, right? There’s just a lot more work to manage multiple single-family homes than to manage one multifamily property. That’s the truth. Uh, with multifamily property you have one set of things to manage. You have one HVAC system, one roof, one landscape to, you know, keep in order, one common area. Uh, you have one address for your property manager. So it’s easier for them to travel. If it’s a large enough property, sometimes you might have onsite maintenance or onsite management, one onsite manager to make sure everything’s going right. And the simplicity goes all the way down to the paperwork. You have one lease template you have, you know, all you have to do is change the unit number and the dates, uh, for each new tenant in a multifamily property. Right. As opposed to when you have 50 single-family homes nationwide and you’re working with different property managers in each geographical area, I’m sure they all have different leases. They all have different fees. They all have different things. That makes it very, very tough to track all this stuff. As an investor, it doesn’t really result in the most passive experience.
And if you listen to the show, you know, I talk a lot about passivity of investments and single family homes are not the most passive investments. They’re just not. There’s vacancy, there’s maintenance, there’s break-ins there’s thefts. There’s poor management companies that can make your life a living hell. It just happens. Okay. And that’s why I believe that more of my investors are gravitating towards loaning on investments that are asset-backed in a market like Dallas, which are commercial properties that are cash flowing. Multifamily properties are cash flowing. I’ve yet to buy, you know, a portfolio of single-family homes and raise money from my investors that takedown that portfolio of single-family homes. And it’s because of the fact that it’s just, it’s not going to be very easy for me to manage. It’s just not. I’d prefer to just do, you know, 4 four-plexes, like we’re doing right now, which the deal’s about to close. I think we’re going to close that one here at the end of the week. We raised that money in a month where the private money lending program has been taken off by storm.
And so if you have not looked into the private money lending program just yet, I recommend you do so. Especially if you’re a cash flow-centric investor looking for double-digit returns. Okay. And you still want to invest in the Dallas Fort Worth market, the strength, you know, have that market strength behind your investment to really minimize your risk. We have those opportunities here.
Um, the next thing I want to get into with multifamilies is they’re easier to cash flow. It’s much easier to cash flow a multifamily property than it is to find a single family rental today that cash flows. It just is. With single-family rentals, you have a month in between leases when the property has to be cleaned and readied for the next tenant. So that’s obviously going to be some downtime there where you’re not collecting rent. And so during that month, you won’t cash flow and then even the next month you’re paying a leasing fee in most cases to place that tenant.
So you could go up to two months, at least with no cash flow with a single family rental. You’re still going to have expenses that month, but you will have no income because it’s just one actual unit. Okay. With multifamily you have multiple units, so if one goes vacant, the others are still cash flowing. Okay. So that’s a really, really good thing too when it comes to multifamily. Now, if you’re an investor listening to this show and you’re still new to real estate investing, I recommend you know, and maybe you don’t have that much money to play with right now. I still recommend buying some single-family homes. I wouldn’t say don’t do that. You know, you’ve got to start somewhere. And if you ask any multifamily investors out there that are successful, I would say 90% of them started in single-family. Okay, so this, this episode is not to deter you from buying single-family homes.
I just don’t believe it’s the best time to capture all the six ways that single-family homes can pay you, that real estate can pay you, but it, it’s not going to hurt to go start with single-family homes and start to familiarize yourself with how these things are managed and how it all works and started building a little portfolio because you can still sell those off and you can still take that money and roll it into a multifamily project when you’re ready. Not everybody has the money right now to put down on a multifamily building or a small apartment complex, but you need to start somewhere. So it’s not a bad idea to start with single-family homes. Like I said, 90% of multifamily investors that are successful started in single family. I can guarantee that.
Another thing is, there’s more revenue streams with multifamily. Uh, you have the opportunity to make more revenue in addition to rental income, right? You can place coin-operated washers and dryers in the property, snack vending machines. You can build a carport or garage and offer tenants covered parking at an extra charge. We do that with our commercial properties as well. Uh, commercial office spaces, you know, covered parking is very attractive. We do have hailstorms out here in DFW. So covered parking is a, is a highly sought after thing that you can charge more for. You can offer storage units for additional fees and, and there’s, there’s a lot more ways to add revenue streams with multifamily, like charging a nonrefundable pet deposit, which we even do, um here at, at our company, at AmericanRealPM.com on our single-family homes. We charge a nonrefundable pet deposit; and bike racks, you know, there could be a lot of different things that you could charge for with multifamily where you could not do that with a single family home. Uh, but we’re going to take a quick commercial break and when we come back I’m going to talk about a few more ways that multifamily has some advantages over single family. So stay tuned. We’ll be right back from this commercial break.
And welcome back from the commercial break. This is your host John Larson. This week we’re talking about seven advantages of multifamily properties over single-family properties. And you know, once again, just remind the audience, I’m a big proponent of single-family homes. It’s a great way to get your start into real estate, but there are some advantages of multifamily where my business is now starting to gravitate more towards multifamily and more towards commercial properties, commercial office space, and um, you know, raising funds from our investors, syndicating funds, paying the interest payment to the investors instead of the bank. Um, giving my investors an opportunity to see double-digit returns in a market like DFW, which is very difficult to find. Um, I’m constantly trying to come up with new strategies to make my investors’ money. And make my investors money in a passive manner.
We’ve covered, I think about four of the seven reasons why multifamily, I believe has some advantages over single family. I’m going to get into the last three here and one of them is lower maintenance costs. Um, if you find that you need to replace or restore a roof or have a building painted or on a multifamily unit, the cost will be a lot less than if you had to do the same thing on a dozen single-family homes. Right. That makes sense as well. Uh, with a dozen single-family homes, you have a dozen roofs to replace. You have a dozen, uh, you know, rooms to paint, you know, more than a dozen. Take a dozen and multiply that by three, you know? Right. It’s just a, it’s a lot more things that you have to take care of. Lawn maintenance is less expensive on multifamily because you only have one lawn, right? I mean it might be larger, but you’re not paying somebody to go cut 12 lawns as opposed to just one, maybe slightly larger lawn. Okay. Many landlords will include lawn maintenance with single-family homes to ensure that the lawn’s kept to neighborhood standards. Right. Especially if you own some single-family homes within an HOA, they’ll keep ticketing you if the tenant is not keeping up with the lawn and keeping up with the bushes and all that sort of stuff. But then that just adds extra cost to you. Right. And just another extra headache, which just doesn’t make it very passive for you. Right. And as you know, every spring you need to fertilize the lawn. You know, you have to make sure that, you know, you’re keeping up maintenance. So there’s not weeds growing in the lawn and things like that. So you know, it‘s a lot easier to maintain multifamily properties, it just is right? It’s just one building on one parcel as opposed to, like I said, 50 buildings over 50 parcels. Right? Uh, also exit strategy. It’s one thing that I think a lot of investors lose sight of. Everyone’s very excited to invest in something, but exit strategy is an important thing. Now, here’s one thing where I might not totally agree. With multifamily, you’re really only gonna have one exit strategy and it’s usually going to be to sell to another investor. Whereas with single family homes, you have a couple of different exit strategies. Uh, you could sell to another investor, but if you buy a property in the right neighborhood, which I’m a big advocate of buying high B to A class property because you have retail demand for properties as well. And that’s the only way that you’re gonna be able to capture appreciation because an investor’s not going to overpay for property. Sometimes the market value of a property, um, chokes out the cap rate, chokes out the return, right? So you can’t sell that property at market value to an investor, but you could sell it to somebody who wants to move there and live there themselves and you know, then will buy the property at market value from you, right? They’re not an investor, they don’t care what the cap rate is or what the rent is. They just want to live in that neighborhood. So I think really the advantage goes to the single-family investment on this case, uh, because you have multiple exit strategies, but to serve purpose here, you know, you have one exit strategy on multifamily properties. You know, I guess we’re, it’s kind of like the flip side is if you have 12 single family homes, then you’re trying to sell 12 single family homes, right? Or 50. Right? Very rare that you can sell like all of them to one investor, especially if they’re all spread out over a geographical location. Maybe those investors don’t buy in certain areas where you own properties. So you’re kind of trying to find multiple buyers to take down your whole single-family portfolio. Whereas with multifamily, I guess I can see how it would be slightly easier to do the transaction, but it doesn’t mean that you’re going to have multiple buyers, uh, looking to take down your multifamily project.
Um, and you’re definitely not going to have a retail person, you know, buy that property. These are traded on cap rate. You’re really only going to be dealing with investors. But I will say the ease of just being able to transfer that one 50 unit building would be easier than trying to offload 50 single family homes. Okay. But like I said, one of the reasons why I really like single family is because you have those multiple exit strategies. Now, if you’re buying C and D class properties, single family homes, you’re probably only gonna have one exit strategy there too. And that’s to sell to like another investor, slum Lord. Like I like to call them, people that own D class properties that are primarily section 8 and things like that. So you have multiple exit strategies with single family. But I can see on the flip side, it’s easier to just sell one building, right? As opposed to trying to do 50 transactions, selling one building, one transaction.
Improvements, uh, affect more, I guess is another reason. And probably the last, the last thing that I have here on the seven reasons why. When you make an improvement to your multifamily building by, for example, replacing the roof, your investment and effort affects the value of a lot more valuable property. Every unit in the building benefits from that roof. Once you replace a roof on a single family home, only that one unit is affected, right? Your return is exponentially higher with multifamily than a single family rental. Okay. Does that make sense? If you have 50 or let’s just say 15 units under one roof, you replaced that roof, you add value to all 15 of those units. With a single family home, you make the same investment, you’re only, you know, improving just that one dwelling. Okay. Capital Improvements. Also, you know what I mean? Putting granite in your units. Um, retiling your bathrooms, putting new appliances in your kitchen, putting in, you know, that like that little simple stuff to an apartment unit. It just makes a world of difference. You know, um, you can really, really see yourself increase rent by just doing some of those cosmetic things, enhancing those units. Whereas with a single family, you can see the same type of thing but not as drastic, I believe. You know, adding granite to a single-family home as opposed to just having like a Formica in there that kind of looks like granite isn’t going to get you much more value on your rent. But in multifamily, it does go a long way, for sure.
If you’re ready to scale up, you might want to consider getting into multifamily rental properties at some point. Uh, although they’re more expensive like I said, and they’re more expensive to operate, they offer a lot of advantage to experienced investors. They do. And so, you know, if you’re not quite ready to get into the multifamily rentals personally, but you like the idea of getting into commercial real estate and private money lending or just loaning out a multifamily project to start with, um, reading the PPM, seeing how the deals are constructed, put together. I think it’s a good way to start. So maybe you might just want to lend on one first before you go ahead and take one down yourself. If you’re interested in doing any of that if you’re interested in getting involved in our next private lending program. Because I think we just completely funded the Irving four-plex deal. That was only a month. So if you missed out on that, I’m sorry. If you still want to get involved with our private money lending opportunities, just visit AREIUSA.com or RealEstateCowboysDFW.com and a member of our team will reach out and give you more information on our private money lending program. I’m in the works of finding, I’m looking at a couple of different deals that I like right now, so we should have another deal here soon. But if you want to go ahead and get your name on the list and just say, yeah, I’m interested in the next deal. Do you want to go ahead and start putting your money in escrow? I can start paying, you know, letting that money accrue interest for the next deal. Just reach out to our team, RealEstateCowboysDFW.com AREIUSA.com.
Put in your information and we will reach out and get the process started and start getting you double-digit real passive returns on your money. Um, on, on assets. You know, that this money is backed by an asset in DFW, Dallas Fort Worth, which I truly believe is the best market in America right now for real estate. Uh, and that’s why we’re the Real Estate Cowboys. So that’s all we have for this week. This is your host, John Larson. Always remember what is your return on life. And I’ll see you again next week. Have a great week everybody,
Announcer: All opinions expressed by the host of the show are the opinions of American Real Estate Investments LLC and do not reflect the opinions of guests or sponsors. No personal or professional advice on this program should be considered an endorsement to follow a real estate financing or investment strategy. Before acting on any information, seek advice from your financial tax, mortgage or real estate advisor, as the information is not guaranteed and investment strategies have the potential for profit or loss.