070: Are Single Family, Multifamily, or Commercial Properties the Best Investment?

I have always bought single family rentals, except for one duplex I bought last year. I sold that duplex this year for a nice profit, but single family homes have been very good to me. I am not going to say single family homes are always the best investment, because I think different investments work better for different people in different markets. I stopped buying rentals in Colorado because our prices have increased so much in the last few years. Many people have asked me if I have thought about investing in multifamily housing, since prices are so high.

I have thought about multifamily, but the prices for that segment is extremely high in Colorado as well. I have also thought about commercial real estate investments the last couple of years for personal reasons and investment reasons. I don’t like many commercial investments, because the market is so cyclical and commercial properties can be very complicated. However, I do have certain commercial niches I am interested in, and may invest in shortly. On episode number 70 of the InvestFourMore Real Estate Podcast, I talk about my investment choices, why I make them, and what my future plans are.

Why do I like single family homes over multifamily properties?

I invest in single family homes for the most part for a number of reasons:

  • There are more single family homes in my area, which makes getting an awesome deal easier.
  • Single family homes are easier to manage, because the tenants stay longer, take better care of the homes, and pay all the utilities.
  • Single family homes are easier to sell because you can sell to an owner occupant or an investor, where multifamily homes can only be sold to investors.
  • Single family homes provide more diversification. 20 single family homes are less risky than 20 units in one multifamily building in my opinion.

What are the advantages of multifamily investment properties?

Just because I like single homes, does not mean they are the best investment for everyone. The rents on single family homes versus multifamily homes can vary greatly in different markets. The cap rate in my area for multifamily homes is about 5 percent, where the cap rate on multifamily in other markets could be 10 percent. You might make more money on multifamily in some markets than you would make on single family homes. There are other advantages as well:

  • You can house hack with multifamily properties as well, which can make buying rentals easier.
  • The repairs and maintenance may be less on multifamily because more units are under one roof.
  • You can scale up faster with multifamily properties if you are looking to buy large complexes.
  • Some areas will have more multifamily properties than single family homes, which makes finding a great deal on the properties easier.

Why am I thinking about buying commercial properties?

I have 14 rentals now, after selling two this previous summer. I want to keep buying rentals, but the market in Colorado is not conducive to single family or multifamily rentals. I have looked at Florida and other markets to buy in, which I will do eventually. I have also looked at buying commercial properties that would benefit me with storage space and rental units as well.

[0:00:14.0] MF: Welcome to the InvestFourMore Real Estate Podcast. My name is Mark Ferguson and I am your host. I am a house flipper, I flip 10 to 15 houses a year, I own 13 rental properties with a goal to buy 100 by 2023. I’m also a real estate agent. I’ve been licensed since ’01, I run a team of nine and we sell close to 200 houses a year.

So on this show, we’d like to interview house flippers, landlords and the best real estate agents in the business. So stay tuned for some great shows, if you want more information on my rentals, on the numbers, on how I buy properties, check out InvestFourMore.com.


[00:00:58.8] MF: Hey everyone, it’s Mark Ferguson with InvestFourMore. Welcome to another episode of the InvestFourMore Real Estate Podcast. Today, I’m going to talk about single family versus multifamily investing. I’m also going to work in my personal rental property strategy, I have single family rentals now but I am considering not really multifamily but more commercials. I’m going to tell you some of my reason behind that and, then of course we’ll talk about some other things going on in my investing world.

I just want to mention quickly, my book Build a Rental Property Empire is now on the top 10 of all real estate books on Amazon. So that was really awesome, really cool to see the other day. Amazon has it discounted a ton. It’s down to $12, which is way lower than I could price it myself and that’s for the paperback copy. So be sure to check that book out. I’d love to hear your views on Amazon. I love getting e-mails from people telling me how much they liked it and if you have a few questions, you can always e-mail me as well, [email protected]

All right, so today I have always invested in single family rentals. I really like them. I’m going to go over why I really like them, but just because I like single family does not mean they are right for everyone. Other people have had a ton of success with multifamily investments. I’ve had many people on my podcast who love multifamily properties and have made a lot of money with them. So I don’t think there’s a one size fits all. You have to invest in one or the other, one is always better than the other. I think a lot of it depends on your goals, your market, what you’re looking to do, how much money you have, how much time you have, there’s so many factors that go into what is a better investment.

I bought my first single family rental on December of 2010. I bought a total of 16 through this middle of last summer. I think September of 2015 I bought my 16th rental and I have not bought a property since then. You know I have a goal to buy 100 rentals but the market here in Colorado is just crazy. It continues to be crazy. I keep saying that every month, it seems like, and every year and it just keeps going up and it’s gotten to a point where it’s really, really hard to cash flow with single family rentals. Just prices are too high, owner occupants are willing to pay a lot more for these houses, rent to value ration do not make sense for me.

I can still get great deals. I can still buy well below market, that’s not a problem but the cash flow is a problem. So I have 13 fix and flips going right now. Definitely finding the deals, most of those are from the MLS but I have not bought any rentals just because on the flips, I can sell them quickly. I’m not worried about the long term cash flow or long term market. I am worried about how much money I can make on it in the next six months.

That’s why, people who listen to my podcast will know, I’ve been looking to invest in other states like Florida. A little glad I haven’t bought any rental properties in Florida yet considering the hurricane that is smashing into them right now or by the time you listen to this podcast, will probably have already smashed through Florida. Still, I would be totally into buying in Florida maybe there’ll be some good deals down there once the storm has passed. We’ll see.

But I am also looking into some other things closer home to me not really single family properties but commercial/multifamily a little bit and I get that question a lot, “Since the market has been so crazy for single family homes, have you considered buying multifamily?” And usually my answer is no. The main reason is the market for multifamily property in Colorado is just as crazy as it is for single family. The cap rates here is around 5%, which is really hard to make any money with unless you pay cash.

Demand is really high for multifamily, the values on multifamily properties compared to the rents that they bring in do not make sense for me either. I think a lot of investors are parking cash into real estate in the hot marks around the country like California and Colorado and they aren’t as concerned about how much money they’re making, the cash flow. They just want a safe place to put their investment and maybe in 10, 20 years they will be a worth a lot more than it is now.

So those are the type of investors or investing that I want to do or that I think many of you want to be a part of. You want to be able to make cash flow, make money right away. You don’t have millions and millions of dollars sitting in a bank account, sitting and twiddling your thumbs trying to figure out how to spend it. All right, so before we get too much into multifamily commercial, I want to talk about why I love single family first.

I bought my single family rentals because I knew single family really well. I have been an agent for 15 years now, dealt with many single family homes and in my market, there just aren’t many multifamily properties. There are some; there are fourplexes, there are duplexes, there are some larger apartment buildings, but the majority of houses are single family homes. So I knew single family really well and that was one reason why I invested in them.

I am glad I did. One reason is because since there are more single family houses, it’s easier for me to get a great deal on them. I can find foreclosures, estate sales, auction properties. It’s just easier because of the sheer number of single family homes to find great deals that cash flow. Whereas with multifamily, there are so many fewer of them, it’s hard to find a good deal, those deals are snapped up very fast and prices are higher.

So if you’re in a market where there’s more multifamily than single family, maybe it makes sense to go after multifamily because there is a larger pool of them, easy to get a better deal and you can make more money of them. That’s why it’s so dependent on where you live, you market, what your goals are, how you invest. There is no one fits all strategy. Another thing I love about single family homes is they are very easy to manage.

I managed my rentals up until I had seven and then my wife told me I had to stop because even though I said I managed my properties, my wife had a lot to do with the management. So she was a little annoyed with and frustrated with dealing with some of the tenants and getting calls. So I hired someone on my team to manage them, but they are very simple to manage compared to some other properties. You know, the tenant pays gas, electric, water, trash. The tenant maintains their lawn. The tenant takes care of most of the property.

Whereas with multifamily, the landlord is probably paying water, they might be paying other utilities. They might have to take care of common maintenance areas like parking lots, the yard they might have to take care off, trash they might have to take care off. There are many more expenses and many more things to be responsible for when you are dealing with multifamily. And another deal I found with single family is the tenants tend to treat it as their own house when they have a single house not attached to any other building.

They’ve got a yard, it feels like a home to them, it’s not like an apartment where they know they’re going to be moving at some point to somewhere else. They know they’re trying to move up to something better. It is their own house and many times they will fix things without telling us. I don’t always like that, but they’ll maintain the yard really well. They’ll have pride of ownership in the property and they will stay longer. I have many, many tenants who stay multiple years.

When you have multifamily apartments, your turnover is going to be much greater. If you’re leasing the properties, managing them yourself, it will take much more work so you’re going to have to be leasing it to more people, vetting them, checking references, checking credit, all of that. And if you have someone else managing your properties, like a property managing company, they maybe charging you a leasing fee which means every time you lease a property you might know them half a month or a month’s rent, which can really decrease your cash flow. So there’s a lot of things that you’re going to consider multifamily versus single family.

Another reason why I really love single family homes is they’re easier to sell. So I don’t plan to sell all of my mine, of course I said I never plan to sell any of them and I sold two of my rentals this summer. I sold them because our market is so hot and they are two of my least desirable properties. One was really hard to rent and the other one was a college rental, which didn’t meet my buying criteria for other rentals and about last year in 2015, I stretched some of my buying criteria just to keep buying.

It worked out fine, I made really good money on both of those houses, but I sat back and thought, “Hey, I don’t want to keep buying rentals just because I said I had to buy rentals. I want to make sure they’re good deals and I am making money on them and they’re cash flowing.” So I sold two of those and single family homes are just usually easier to sell because you have multiple buyer pools. You can sell it to owner occupants or you can sell it to investors.

So if you have a single family home, the market is really good for owner occupants. Usually they will pay you more money than an investor will so that’s really nice and then if the market might be down for owner occupants or rents are really high in an area, an investor may pay just as much as an owner occupant for that house and rent it out. So it’s great to have both options, it’s easier to sell, there’s many, many more occupants looking to buy than there are investors looking to buy. So I like to have that larger buyer pool in case I have to sell my houses or want to sell them.

When you’re dealing with multifamily properties, your main buyer pool is investors and that is pretty much it. There are many fewer investors than there are owner occupants so your buyer pool is much smaller. If the economy goes down, if lending guidelines get strict, if interest rates go up, it might really hurt your ability to sell your properties because there will be less investors looking to buy. And when investors are looking to buy, they’re basing their criteria strictly off the income usually cap rates, how much money they can make on the property.

Whereas an owner occupant is looking at what else they can buy, what else is available on the neighborhood, how much do they have to spend for that house, they don’t care about the rent coming in. They care about what else can they buy for that same amount of money and if your house you have for sale meets their needs. So because of that many times single family homes will appreciate more than multifamily as well. Not always, but many times they will because owner occupants can push their prices up due to supply and demand where multifamily homes, the prices are pushed up by investor demand cap rates or making improvements, which we’ll talk about later, which is why I think there is opportunity in multifamily. But strictly on a side by side basis for appreciation, I think single family usually does better.

All right so going onto multifamily, some of their advantages there. Obviously I like single family, I love them. It doesn’t mean I would never buy a multifamily, but for me I think I still prefer single family. Multifamily has some advantages in that one, you can house hack a multifamily property. Many of you may not know what house hacking is, but it’s basically an owner occupant buying a multifamily property, living in one of the units and then renting out the other units to supplement their income and the rent.

Now because the person is an owner occupant, they can buy that property with five, three, even zero percent down with like a VA loan and they don’t have to put the 20 or 25% down an investor has to put down. So it can be a way to get into a properties much cheaper than buying strictly as an investor. House hacking also has a very nice advantage and that you’re collecting rent right away. So you have to have four units or less usually to buy as an owner occupant.

But if you start out as an owner occupant buying a single family house that you want to turn into a rental, you can do that same low down payment. But you have to live in that house for at least a year as an owner occupant and if you’re buying a single family home, you’re not collecting rent that first year, you could just collect rent once you move out. Well, qualifying for another rental property might be tough if you’re not making much money or have high debt to income ratios because banks don’t want to count that rental income until you’ve have the home rented for a while, some banks it shows up in your taxes.

So it could be a year after you have the house rented before you can even count that income on your taxes, which makes it very tough. However if you are house hacking, that rental income you’re making from the units when you first buy it, you’re ahead of the game a year by having an income coming sooner. Hopefully it is making your payment and making you a little bit of money as well. So house hacking can allow you to buy another rental property sooner if you are doing the owner occupant purchase rent after you live there a year method. That’s one advantage of multifamily. That’s a huge advantage if you are trying to start out and you don’t have much money. So that’s one thing to consider.

\Another thing to consider is I think a lot of people talk about economies of scale where you have 50 units or 20 units under one roof, one building. There’s less maintenance, there’s less repairs. I sort of agree with that in some ways, but not all. Yes you have one roof and that roof probably would be cheaper than having 50 separate houses. Yes, there is one building and maintaining the exterior of that building is probably cheaper than maintaining 50 different houses.

However, if you had 50 separate houses, your rents will probably be much higher per house than you’re going to get per unit in that 20 unit apartment complex. Same for the siding, everything else, your rents could be much higher for a house. Your appreciation potential is going to be much higher than that multiunit property. So yes per unit basis, the expenses will be less but compared to a rent to value ratio, I don’t know if it’s always the case.

And something you have to consider as well is I like having separate houses because it diversifies my investment for neighborhoods, if something happens to one house. Whereas if you have one 20 unit apartment complex and there’s an accident there or what if a meth bust happens or a meth lab is discovered there? Your whole property just got shutdown. Everybody has to move out. You have 20 vacant units, you may not be able to occupy that property again for a year until it’s cleaned up. You might have to gut that entire property if it’s a meth lab and your insurance is not going to cover any of that.

So you have all of your eggs in one basket with that apartment complex. Whereas if you have 20 separate houses, yes you have one house that would be vacant, you might have to gut it but while you’re doing that, you have 19 other houses still bringing in rent, still performing okay. So to me, I think it is safer to have your rental units diversified into more properties than just one. Not very likely that you will have a meth house in your apartment building, but it could happen. I’ve seen it happen here. It has destroyed investors because there is really no way to protect against it if it does happen. so that’s something to consider.

One of the big advantages and you will hear that on my podcast with other people like Michael Blank, Joe Fairless, some other guys who are doing the big apartment building investing is they’ll syndicate properties. So what they’ll do is they will look for giant, a 100, 200, 500 unit apartment buildings, bring in a bunch of investors to pay for the down payment and they’ll look for properties that are under rented, need work, aren’t managed well and the value of those properties is based on the income they bring in because they are multifamily income properties.

So maybe it’s a million dollar property because it makes a $100,000 a year. Well, if the property is not managed well, the rents are low, it just needs some sprucing up maybe you could actually collect a $150,000 of rent with some new management and just based off that simple evaluation, your property is now are worth $1.5 million by increasing those rents. So that’s one way to make money in multifamily and you could do it on a large scale, which is where I think the real opportunity is if you want to be in that space.

Buying properties that aren’t in good shape, are cheap for whatever reason, going in, fixing management, upping rents, redoing the properties and then either holding them with the increased cash flow or selling them, doing the same thing over and over again. There is opportunity there for sure but it’s a lot of work. It’s not easy. It’s not easy finding large apartment buildings, it’s not easy finding large apartment buildings that are cheap or they are mismanaged or where there’s a lot of opportunity. And then you’ve got to find financing, most likely you have to find investors if you don’t have all the money for down payments and repairs and it can be a complicated process. So I am not saying there’s not an opportunity there. I’m not saying you can’t do it but don’t expect it to happen overnight.

All right so what am I looking at doing? Like I said, a lot of people have said, “Hey Mark why aren’t you look at multifamily properties since you can’t find single family?” And I’ve said it before, multifamily does not cash flow, is not any better investment here than single family. I have seen a couple of properties pop up that seem like a decent deals on the surface and I got to them and they’re huge piles of junk that needed so much work and so much money. I wasn’t interested in them for 30% less than what the price was and they end up selling for that price or more. I’m just like, “Oh my God what’s wrong with people?” But there’s not much opportunity there.

However, I have started to look at some commercial space. So that might be my next venture. One of my articles talks about how commercial is not the best investment for beginners, which I agree with too. There are so many things that go into commercial, cap rates, leases, triple end, finished space for tenants, non-finished, utilities, it’s just really complicated. But there’s a lot of money there to be made as well with the same concept as multifamily, buying undervalued or under leased properties, underutilized properties, converting them to something new, getting leases in place, bringing up the income and then creating value by managing them better.

So I have always kind of wanted a warehouse or some kind of shop where I can have my own space for building supplies, for flips, maybe a few cars too and subdivide out the rest, rent out the rest of the property, make some money that way. So I have looked at a couple of properties in the area that are commercial. Looked at large warehouses, small shops, all types of different things and I want properties that are a good deal. I don’t want to pay retail for anything. I don’t think I could ever pay retail for a property in. I am not sure if that’s possible. So that might be my next adventure. I’ll keep everyone posted of course if anything happens.

But looking at undervalued under leased commercial space, industrial space even. I am not a huge fan of office buildings or really retail spaces because I think the market can change so fast with the economy, with office space. I think it can change so fast with retail and what locations are hot, what aren’t. If rental rates change a bunch that just kills your value right there. I don’t want to place that has one giant tenant or two giant tenants. If you lose a tenant, you might not rent it for two years, it can be very risky.

So shop space, industrial space, I think that’s where I really want to focus. We’ll see what happens, where it goes. It’s a lot of work, I’m learning everything about the lease rates. I am not a commercial agent, I am not a commercial broker, it’s a completely different ballgame. But I think it will be fun. I think it will be interesting and I could have my own space as well, plus make a lot of money on a property if I did it right.

So today, not the longest podcast in the world, but hopefully this falls some good information for you guys. Again, tons of information in my book, Build a Rental Property Empire. If you guys are interested in rental properties, I do talk about commercial, multifamily, and different investing options in there like house hacking, finding good deals, all of that. Again it’s available on Amazon, pretty easy to find and yeah, if you guys have questions let me know. I’d love to see comments and we will talk soon. Thanks for listening.


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