“High-end of the Low-end. That is where the value is in terms of what we do.” – Raphael Castro
If you have made the wise decision to start investing in real estate but want more in-depth knowledge between the differences of a single-family or a multi-family home? Then look no further as Jorge Vasquez and Rafael Castro discuss the advantages and disadvantages in determining which properties are better to start in.
Note – This article has been created based on the YouTube video titled “Single-Family or multi-family Properties – Which is a Better Real Estate Investment?” by Rafael Castro and Jorge Vazquez.
Rafi: Our topic for today is simple: Which is a better investment? Multi-family or Single-family properties?
Jorge: That is a good topic Rafi, they are both great investments. But if you are a beginner in real estate properties, a single-family home is more straightforward. Gathering data and values to decide on buying a single-family home is also more accessible. Buying an apartment complex is difficult. You usually need professional help to come up with a value with an asset.
Rafi: So you are saying that a Single-family is from basic to intermediate while Multi-family is more on the advanced side?
Jorge: The ideal business plan at Graystone is to start buying single-family homes. Once we feel comfortable and have mastered that, and have multiple assets, then we move into the apartment complexes. But there are different types of multi-family homes, such as duplex, quadruplex, and apartment complex.
Rafi: So, what would be considered a multi-family home? Why would duplex and triplexes be recognized as multi-family homes?
Jorge: Normally, they have multiple families. There is more than one family under one roof.
Rafi: What makes them more complex to manage than a single-family home?
Jorge: When you deal with a duplex, you are dealing with more families. It might seem like a good idea initially because you would think that you receive two rents. However, in a duplex, the rent is lower, and it reduces cumulatively the more families rent in a multi-family home. If you have a house with a triplex or a fourplex, that is not a house. That is more like a villa or an apartment. The rent will be lower as well as the type of tenant will be of lower quality.
All it takes is one of the tenants to do something wrong. As an analogy, it takes only one apple to spoil all the other apples.
Because of that, I would go from a single-family home with a hundred units minimum before investing in multi-family apartments. So every time you want to invest in a multi-family home, go for the big numbers. Like a hundred or more. Do not get anything less because you will be better off with single-family homes.
Rafi: Okay. Things you need to consider if you have a single-family home that you want to dispose of are the appreciation going up, the lower cap rate, and having a bad tenant. It is easier to move one tenant versus multiple tenants with various contract dates. Taking to account all this makes multi-family homes more challenging to handle.
Single-Family vs. Multi-Family
Jorge: A Single-family home is grade A, while a multi-family home is grade B.
If you are investing in a property that is a grade C area, then it yields lower rents. The sweet spot tenants we are looking for are the ones that pay a minimum of around $800 – $1000. Comparing this amount to a multi-unit home in a B or C area, the rent will be below $800.
Rafi: If I am an investor, with $1,000,000, why would I buy a big apartment complex instead of buying 10 multi-family homes?
Jorge: Because the whole point of having multi-units is to offset risks.
You have more money coming in. But with multi-units that are smaller, you increase the risk. You have more people living together, and If you want to lower the risk factor by having more rents coming in under one roof and one property manager, the best option is an apartment complex.
Also, if you have $1,000,000 and want to buy an apartment complex, it is not that simple. There are more advanced transactions involved, such as paying around $10,000 just for evaluation. This is more complex and would be better if you consider commercial real estate.
Rafi: You mentioned a property manager, we always advocate getting a property manager, and in this situation, especially if you are managing multiple tenants.
Rafi: Make sure that your property manager has experience in handling multi-family homes or apartment complexes’. When you handle multi-family properties, this will equate to higher expenses. Most repairs will apply to multiple units, such as plumbing. It also multiplies, depending on how many families are renting the property. You will need a higher maintenance reserve for multiple units, which lowers the cap rate. It’s about the percentage at the end of the year, and we would like that to be as high as possible.
Jorge: For those of you in the bay area, you wouldn’t buy a duplex in Sulphur Springs, there is a reason why Sulfur Springs is suffering because it’s a C area with a C or D property. Would it be the same case in South Tampa? You will be paying more money for a property in South Tampa, but you will be better buying a single home in the high-end of the low-end neighborhood.
Rafi: High-end of the Low-end. That is where the value is in terms of what we do.
Rafi: In terms of appreciation, which one appreciates more, single-family or multi-family?
Jorge: A single-family home’s value can be easily determined. You can go online, or you can get a CMA (Comparative Market Analysis).
With multi-units, especially the big ones that are a hundred plus. You make the value yourself by increasing the curve value of the rents by fixing the apartment complex.
About 9 times out 10, anybody buying an apartment complex is looking for future appreciation and a higher cap rate. Most investors will look at the operating cap rate now, but they are more focused on what is the potential cap rate 2 – 3 years down the road after the repairs because they base their sales price if they plan to flip it based on the cap rate number.
Most of the cap rates in apartment complexes in Tampa, don’t go any higher than 5 or 6. The only time that somebody will buy to invest is to buy it at 5 to 6 and sell it at 7 to 8, that is the norm. There should be opportunities in an upcoming area that they can fix and start getting around 8 to 9. That could be the difference.
Rafi: Ok, That’s it for today. Visit us at homes4income.com, where you invest, and we do the rest! See you again in the next Graystone Investment Group session.