Benefits of Investing In Single-Family
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 the benefits of investing in single-family instead of multi-family. There are pros and cons to both but why does single-family benefit you more?
Keep the #CowboyCoffee hot while listening to John, and the Cowboys talk about how to #BeACowboy and earn passive income in real estate.
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 and welcome back to another episode of the Real Estate Cowboys. This your host, John Larson. Now we’ve been talking a lot about debt syndications, equity syndications, just because I believe right now it’s a good time with what we’re seeing in the market to get involved in deals like this, especially in the right markets in America. And you know, being the Real Estate Cowboys, we talk a lot about the state of Texas and the real estate opportunities that are out here in Texas just because the economy is just so good here. So diverse. Out of all the lists of cities I’ve been seeing in America that are potentially coming up on a housing crisis or correction, we’re not seeing that as much here in Texas. We are seeing a slow down a little bit on the higher priced properties, even here in Dallas. So 350,000 and above, but below three thousand three hundred thousand and especially below $250,000 we have not really seen a slowdown in the market. Even with the rising rates. And now rates they’ve been fluctuating up and down and you know, I think they came back down a little bit here this week, but uh, they’re still hovering around four and a half percent. And for investor loans, you know, you’re looking at as high as six percent with 20 percent down. So this week we want to talk about single-family rentals. Again, I want to get back on that subject. We’ve been talking like I said a lot about the debt and equity syndications out there. And I still, you know, I’m a firm believer that if you’re looking for a cash flow stream, debt syndications that we’re offering right now are, are a really, really good option because it’s getting you double-digit returns in a very safe market like Dallas. And when I tell people out there that I’m offering double-digit returns on commercial real estate assets in Dallas, they’re shocked. They’re excited and they want to get involved. Um, I’ve been getting messages on Facebook and Instagram and LinkedIn, leads pouring in through the Real Estate Cowboys DFW website and the AREIUSA.com website. So a lot of excitement for these opportunities. So I can tell there is a need. I can tell that the investors’ market has shifted, investors are not finding good positive cash flow with rental properties and are looking for other options out there. And so fixed double-digit returns obviously sound pretty attractive, especially in the Dallas market, right? We’re not talking about Jackson, Mississippi, we’re not talking about Birmingham, Alabama, we’re not talking about Cleveland, Detroit, we’re talking about Dallas. A lot of excitement there on that front.
But this week I want to talk about the benefits of single-family rentals over multifamily properties. So I get this question a lot. We get a lot of our investors that come to us and ask if we do multifamily projects and you know, we do, but on a syndication basis. You know, the idea with the multifamily project is to flip out of the project in, you know, a year to 18 months. So that means going in, renovating the common areas of the complex, changing the name, rebranding it, uh, you know, painting the outside, just giving it a fresh overhaul in terms of curb appeal. Um, and then we go in and we renovate half the unit. So as the tenants are moving out, we’re going in and renovating the units, bringing them up to today’s standards, updating them and pushing the rents up. And then from there, we’re putting it back on the market basically as a business in a box where a large fund, family office, whatever it may be, will come in and purchase the apartment complex. And we have financials that show what we’ve done in terms of increasing the cap rate with half the units and basically leaving some meat on the bones so to speak. And the way that we structure those deals is through again, a debt or equity syndication. We’ll raise the funds from our clients to purchase the apartment complex, do the renovations, and then we get our investors exited out of the property through then a sale. Okay.
And so I want to talk about the benefits of owning single-family rentals over multifamily properties this week. Now, if you’re looking for a syndication opportunity at a multifamily deal, I think in the right market like Dallas, I know a lot of guys that do that stuff. I think that that’s a good opportunity to own an apartment complex yourself, uh, it’s going to really depend on how hard you want to work. It’s really not as passive as you would think, just as single-family rentals really aren’t that passive. But we’re going to talk about some points to where, you know, multifamily, if you’re just straight own a multifamily building or buildings or apartment complex, one building, whatever it may be, there’s some things that you might not think about that can cause the investment to be a little less passive than what you thought. Okay?
And so each one of these investments obviously has its benefits, but one might be more desirable than the other. Single-family homes, obviously the finance that you can get with those, it’s a lot more attractive than what you can get on a multifamily property. You know, you start getting into commercial loans, more money down, higher interest rates, lower terms, usually an adjustable rate after three, five years is typically what you’re going to see on a multifamily project. And you know, coming into the market right now, I’m not feeling very good. I do know we’re going to run into some rough stretches here where banks may not, you might not be able to refinance into a better loan after three to five years based on what I’m seeing with the market. It’s been running hot for a really long time. So if you’re buying multifamily properties on a 20 year, 25-year term with an adjustable rate adjustment at three to five years, who’s to say that you’re going to be able to refinance into a more attractive loan, you know, or even a loan that’s comparable to what you have. I don’t know, I just, I feel like, with the way that rates are going up right now, I don’t see them going down, and then possibly running into another recession here. Uh, you may be stuck holding the property that you can’t get good finance on once that rate adjusts. Putting all your eggs in one basket on one multifamily property in one market in America with the volatility of the market that’s coming, I don’t know, I just don’t know if it’s the best route. Now, you know, with single family homes, we’ll get into it, but you can diversify over many different markets across America as opposed to just having all of your eggs in one basket with an apartment complex or an apartment building in one particular market. That market sees some economic downturns, like imagine if you own an apartment building in Detroit and GM’s now talking about laying off 17,000 people, that would probably have a negative effect on that apartment complex that you own.
So getting into it, the first thing I would say, and this is from experience and also talking with other investors and something that you don’t necessarily think about; but its conflict between tenants tends to make multifamily investing far less passive for the owner. So a single family home, you have one group of tenants in one single property, obviously, there’s neighbors, but with an apartment building you’re sharing a lot of common areas and you’re right next door to each other, right above each other. And that can turn into a lot of tenant conflict; barking dogs, loud music, cooking odors; and this kind of stuff can result in threats of violence, sometimes police being called to the property, so on and so forth. And it really depends on the grade of property as well. A lot of investors chasing cap rate right now are buying C class apartment buildings, which are just going to generate tenants who may, you know, have more conflict, right? Who, you know, aren’t taking as good a care of the property. I see it with single-family homes on the C class side. You know, the neighborhoods aren’t as nice with C class homes. There’s more crime there. Well, C class apartment buildings aren’t located in the best areas, either. So what type of tenants are they attracting? And this is stuff that you don’t typically have to deal with single-family rentals, right, because you have one tenant in one single property. As long as your property management team is properly vetting out tenants that should translate into a thoughtful and considerate neighbor. And so community conflicts are rare to nonexistent with single family homes, especially when you get in that high B, A class range and you’re buying and better neighborhoods and they’re just attracting better tenants. You don’t have to deal with the tenant conflict, but I’ve seen it time and time again in the C class type of areas and especially with apartments where everybody’s living in one area and sharing common areas, you’ll see a lot more conflict so that can result in something that’s far less passive than what you were hoping for.
With single family homes too, touched on this, but easier portfolio diversification. Multifamily properties are usually more expensive to buy and the financing available is not as attractive as it would be with for a one-to-four unit property. And with single family homes, you can qualify for Fannie Mae financing, which is obviously the most attractive financing out there. You can’t get 30-year fixed loans even at you know, at five percent, five and a half, even at six, I don’t think right now. Definitely not 30-year terms on multifamily apartment buildings. You just cannot. That type of financing isn’t out there, so the financing for single family homes is still the most attractive. Large multifamily buildings will also require some type of commercial financing like we talked about or alternative finance. And those terms are usually going to come with higher rates and lower loan-to-value structures. You’re going to have to come out of pocket more money and obviously, they’re more expensive to purchase.
So you’re dealing now with an investor that may be a little bit more sophisticated and a little bit, has a little bit more money and is open to, you know, doing a little bit of legwork and just dealing with the fact that the apartment building isn’t going to be as passive, right? Like I said, the term is almost in all cases, shorter. Many of the loans come with an adjusted rate after three to five years. This could create problems for you coming into a market crisis or recession, which I feel like we’re coming into right now. It’s coming. We’re not in it yet, but it’s coming. Banking on refinances for three years from now might not resolve the situation or it might result in a situation where you have no other options. Like I said. So you know, when that rate adjusts after three years, can you afford it? Is it even a positive cash flowing asset at that point, because they’re probably going to base it on Wall Street Journal rates plus one; typically, is what the rate’s going to adjust to. So at that point, if the rate adjusts to that, is your asset even cash flowing at that point or with multifamily big multifamily properties, you’re not really getting that passive experience. And then are you even cash flowing? You know, a lot of times people want to invest in multifamily because the cash flow it generates is higher. But if the rate goes up like that, you don’t have a very attractive loan on the property. What type of cap rate are you getting? What type of cash flow are you getting? So that’s one thing that you need to keep in the back of your mind.
And when you sync all your money into multifamily property, you’re usually stuck in that one market. If the economy in that city goes flat, it can have a major negative impact on your investment, like we talked about with GM. You would not be able to offset those losses with investments in other cities where the economy is still in good shape. Cities like Dallas, Fort Worth. So a lot of my investors that come to me and buy properties in DFW, they own properties in other areas around the country. Many of my investors that come to me might buy in Dallas and then invest with us in Kansas City as well because Kansas City has cash flow on paper and it’s a more affordable property as opposed to the properties here in Dallas. But they like to diversify and like to stick a little bit of money in Dallas too because they feel like, you know, with the A class property in the Dallas market economy’s very diverse here. People moving here consistently. You know, if the other, if other areas of the country are feeling the pain of a recession, Dallas Fort Worth, history has shown us, didn’t really feel that pain. So you know, you may have some properties in other markets where property values dropped. It might be harder to rent them, but your properties in Dallas should be able to at least keep chugging along for you so it can kind of limit the amount of stress that you’re getting on that burden from these other properties located in other areas of the country. And so it’s easy to diversify into other markets with single-family homes. Whereas with apartment buildings, they’re much more expensive. You’re buying a property in, like I said, you’re stuck in one market unless you’re a person that has unlimited amounts of money and lots of money to throw around and you own apartment buildings and multiple markets, good for you. But most people don’t have that luxury, so you know you’re looking to get your stretch, your dollar as far as you can, and obviously diversify into multiple markets to shield yourself from economic downturns in other areas around the country. Single-family homes can help you get that right and so it’s much easier and much more affordable to diversify in other markets with single-family homes. And you can invest in multiple markets across one state or into other states where investments make more sense, right? And diversification is one of the staples of any strong financial portfolio. Anybody will tell you that. Any sophisticated investor will tell you that. So you want to avoid putting all your eggs in one basket as I said.
With single-family homes, what we’ve found in my experience is that they’re easier to rent. You cannot afford to have a lot of vacancy in a large residential building like an apartment complex. You know, if you have a loan on a large building, it means you have a large loan that needs to be paid each month. Not like with single-family homes where a few months of vacancy wouldn’t crush your financial position, right? A large apartment complex and you have a large loan on that property, if you have vacancies to where you’re not cash flowing, you know this could be, this could result in something where you know you’re coming out of pocket with a lot of money to pay this loan down each month. So that’s another thing to consider.
And so with more units, it means you need to attract more tenants as well to keep your property cash flowing each month. With multifamily, sometimes you can’t be as picky or selective as you can with single-family homes because you have multiple units to fill, not just one. Sometimes you have to sort of take what you can get in these situations and that can set you up for failure in the not so distant future, right? If you’re reaching and trying to get bodies in your property in and accepting applications that you may not have accepted before because there’s job loss in the market or we’re in, like I said, an economic downturn, and it’s just tougher to rent your property in whatever market it’s in; You know that can result in a situation where your paying, coming out of pocket for this large loan.
So things have been really good and I think that people have been getting spoiled because things had been so good, but now we’re seeing rates going up and now hearing about potential layoffs and things like that. Need to be careful in what you’re investing in moving forward. So we’re going to take a quick commercial break. When we come back, I want to talk more about the benefits of single-family rentals over multifamily properties. We’ll be right back.
And welcome back from the commercial break. This is John Larson. This week we’re talking about the benefits of single-family rentals over multifamily properties. We’ve talked about, you know, the conflict that you can have between tenants. We’ve talked about easier portfolio diversification with single-family homes. We talked about how it’s easier to rent a single-family home as opposed to multiple units in a multifamily property, and so now we’re going to go into there’s more liquidity with single-family homes. So if you find yourself needing to sell a multifamily property, it could be a very lengthy process.
Really your only exit strategy to sell is to sell to another investor. Since it takes more resources to afford and get financing for such a deal, you could be waiting years to find a buyer, and that’s true. They’re more expensive. Typically, your buyer is going to be another investor like yourself who has a higher dollar amount to work with or potentially maybe it’s an institutional buyer. But depending on the strength of the market, depending on, you know, the cap rate that that property is spinning off currently, that’s gonna have an effect on your sales price. Right? That’s going to have an effect on the interest that investors are going to have in your property. And then let’s say if you’re trying to sell this property when you know loans aren’t as easy to combine, the rates aren’t as good as they used to be. It could be more difficult to get rid of that property and exit out of that property.
And so the reason why I like single family homes, if they’re purchased in the right market and neighborhoods, is it is far easier to exit out of them. There are multiple exit strategies for single family. Whereas with multifamily, you’re not just gonna have a retail buyer that comes along and says, Hey, I just want to buy this multifamily property and I’m going to live in one of the units and, no, that’s not gonna happen. You know, and also multifamily homes are not traded at market value. They are traded on cap rate. They are traded on the income that they are producing versus the expenses. What is that return? And typically, you know you’re going to see these properties depending on the market, but if a buyer from multifamily property has a purchase criterion of, I’m buying at a seven percent cap rate, they’re going to offer you a price for that property based on a seven percent return. And if you can’t agree to that price, then they’re not going to purchase your multifamily properties. So like I said, cap rate, it’s cap rate driven, the exit strategy for a multifamily property. Whereas with a single family home, you could sell it on the retail market to a regular retail home buyer or you could sell it to another investor. Depends. But let’s say your property goes way up in value while you’re holding it, right? Because that’s what the market dictates because you bought an A class property in a good middle-class suburb, in a market like Dallas. Now, based on what the property is worth and based on what it rents for, it doesn’t make sense as an investment. No investor’s going to pay you; let’s say you bought the house for $220,000, now it’s worth $300,000 and it only rents for $1,500 a month or $1,700 a month, no investor – it’s gonna be a positive cash flow unless they purchased with cash maybe, and it’s barely cash flowing. But if they want to get a loan on it, it’s not going to cash flow. In that case, you’re not stuck. You’re not going to have to sell your property at a discount to move it. You would just easily put it on the retail market. Hire a real estate agent or broker and they’ll sell it for you. And they’ll sell it to somebody who’s just looking to move into the home. They don’t care what it rents for. They don’t care what the cap rate is, so that’s another big reason why I like single-family homes. They appreciate in value without having to go in and fully update the units of a multifamily property and pushed the rents up. That’s the only way you’re going to add value with your multifamily property. Raise the rents, update the property, right. Update all the units so you can increase the rents. Okay. Hopefully it’s in an area where you can push rents up to where the demographic that’s looking to move into that building, once you put granite countertops in, Nice tile showers and bathrooms and all that sort of stuff, once you can put stainless steel appliances in it, once you do all that, will you be able to charge more rent? Is that area going to support that? You know what I mean? Are there people looking to move into that area? Many times a C class apartment buildings, it’s not, I mean you can spruce up the units all you want. You’re not really going to push the rents up too much because people living in that area or want to live in that area, can’t afford it. But that is one of the main reasons that I like the single family homes because they’re traded on market value and not cap rate.
You know, cap rate plays a role, especially in the low B, C, and D class realm. But if you’re hanging in that high B to A class realm, your property is being traded on market value. And like I said, your retail buyer is not going to care how much the home rents for. And so that’s why I like that. And that’s why a lot of investors, I will tell you, some people might talk bad about single-family homes, like Ah, there’s a lot of stuff that comes up and it’s not as passive as you think. Well, it’s the same with multifamily. Like I said, it’s just, it’s actually increased with multifamily. Okay. Because more units under one roof, more people under one roof.
And like I said, you’re not going to see appreciation with the multifamily property where you don’t have to do anything to the property to increase the rents and just all of a sudden your property is worth more than it was five years ago when you bought it. It’s all about the cap rates, all about the income that the property generates.
And so let’s move into maintenance. Another big one. Multifamily buildings are going to have more moving parts and a lot more to take care of. An example would be a 30-unit building has 90 plumbed areas, three per unit, kitchen sink, bathroom sink, tub, and shower. The roof size is going to be larger. The HVAC system has a lot more work to do, so your life expectancy on these units is going to be much shorter. You know, everybody wants to ask when they’re buying a single-family home, well, how old is the roof? How old is the HVAC system? How old is this? You’re going to have a lot more useful life on things like roof and HVAC system, or well have to replace a roof, I should say. Replacing a roof on a single-family home is much cheaper than on a multifamily property.
I wouldn’t say life expectancy is longer, but it would be on an HVAC system. You know, with multifamily properties, you tend to, you’d have to replace those much more frequently because there’s a lot more people using them and then it’s heating a much larger space, so on and so forth. So, you know, you would expect that your life expectancy on the unit is going to be shorter than on a single family home. Or it could also be other things to maintain like an elevator, fire systems, outdoor landscaping, and common areas, that’s stuff that you have to take care of. When you rent a single family home, it becomes a tenant’s responsibility to take care of the yard and things like that. But when you own a multifamily building, you still need to take care of the landscaping and the common areas.
You also need a larger property management team to look after multifamily buildings and in most cases, an onsite management team comprised of maintenance and leasing personnel. Depending on how large the building is, you’re definitely gonna need someone there at all times, at least one person. But you know, depending on how large it is, you’re probably going to need an onsite maintenance team. Another thing is just time. My age, I’m only 32 years old, but what I’ve already learned as a young businessman is compressing time frames. And I don’t want to work a really long time to make even a lot of money. I’m trying to find ways and opportunities where I’m saving time, but still making the same amount of money or more money. Right? And with multifamily properties, you’re going to find that there’s more time invested and more paperwork involved with multifamily properties as opposed to single-family homes. And so with multifamily properties, there are always going to be people moving in and out every month. And every time a tenant moves out or in, there is time, paperwork and possibly expenses involved. Okay? More applications must be sifted through. Leases must be negotiated and executed. Deposits have to be paid in or refunded. Units have to be cleaned and inspected upon move in and move out. And this, if it’s a large multifamily building or buildings, you’ll have people moving in and out every month.
Keep that in mind, and so also because you have more tenants, there is much more communication that needs to be had about your tenants, right? More tenants are more communication that needs to be had with your property management team, you’re leasing team, whatever it may be. And so you’d have to respond to frequent complaints which could start to become overwhelming and this becomes anything but passive, so keep that in mind.
If a passive experience is important to you, then I would look at other investment opportunities or investment options. Possibly becoming a lender, possibly becoming a debt investor, right? Or debt syndications, even equity syndications. You’re not the person responsible for the day to day, right? Work that’s involved with renovating a building or building a building, right, on these debt and equity syndications. You’re just playing the bank and you’re getting a return and typically a fixed return. Equity syndication, we talked about this last week, they’re more speculative returns. It’s not a promised 30 percent return at the end of the deal. It’s going to depend on what you can sell the property for. You can forecast what you believe you can sell the property for, but in today’s market, I would believe that these forecasts are going to be a little bit more shaky because we don’t know what’s going to happen here in the next two to three years. Also with single family homes, I wouldn’t say that they’re passive. I believe the high-class B class to A class properties tend to be more passive and give our investors a more passive experience, but they’re not going to be entirely passive. But I believe that they’d be more passive than a large apartment building. It’s because of those reasons I just named. With single family homes, you’re going to have to deal with this kind of stuff too, but on a much smaller scale and with far less moving parts and obviously less employees to manage the day to day operation. Right. With a single family rental, you can hire a management team. You’re only paying eight percent a month based on what the rental income is. Whereas like I said, with multifamily buildings, you might have to staff a maintenance team. You might have to staff a leasing team. You know, all that sort of stuff that goes into it. So, food for thought. Not saying that multifamily investments are not good. I’m just explaining the difference between single-family and multifamily and bringing up some points that not many people think of. I would say. I think they’re just looking at, Oh wow, look, why would I buy a single family home when I could get this multifamily property that has this many units that are bringing in this type of income, but you’re not thinking about what’s my exit strategy? You’re not thinking about are these tenants going to get along? What type of stuff might have to deal with these tenants on a day to day basis, not getting along? You know, there’s a lot of other things that play into it. So that was the reason for this episode this week. I hope you enjoyed it.
If you like what you heard on the podcast, you can go to RealEstateCowboysDFW.com. All the other podcasts that we’ve done are listed on the site. So you can go back and listen to a lot of great podcasts that we’ve had about, you know, luxury vacation rental investing down in Belize or our debt syndications that we do here in the Dallas market where investors can see double-digit fixed returns if you’d like to learn more about how to self direct your IRA or 401k so you can start becoming a private lender through your retirement account and grow your retirement account with fixed double-digit returns. We have great podcasts that talk about that. And great podcasts on property management and you know how to find a good single-family rental investment if that’s what you’re going for. So a lot of good stuff there. Just go to RealEstateCowboysDFW.com, listen in on past podcasts. You can also subscribe to us on iTunes, Real Estate Cowboys, or you know, any other podcast outlet that’s out there. We’re on them all, I believe. I also have my book, The Passive Income Guide, if you’d like to kind of just digest a lot of what we talk about on the show in one quick read. I recommend going on Amazon and buying The Passive Income Guide: What’s Your Return On Life. I had the foreword written by my good friend Keith Weinhold. I was just on his podcast on Get Rich Education, which is another great podcast to check out, talking about our debt syndication opportunities. So if you are not a follower of Keith Weinhold and Get Rich Education, I recommend you go and subscribe to that podcast as well.
If you are interested in learning more about how you can earn double-digit returns or how you can get a single-family property, single-family rentals in the markets that we’re in, which are in the major markets here in Texas and Missouri, go to AREIUSA.com. Put your information in, get some of our free reports. We give away a lot of free education before you get on the phone with one of our investment coordinators. But go there, put your information in, tell us what you’re interested in, tell us what you’re looking for, and a member of our team will reach out to you right away. But thanks for your time. Thanks for tuning in. I will see you again next week on the Real Estate Cowboys. Always remember, what is your return on life? This is John Larson signing off. Have a good 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.