Buy and Hold Multi-Family vs. Single Family

A “buy and hold” strategy is ultimately what leads most investors to their wealth and financial independence. You’d be hard pressed to find someone to argue against that statement. “What?” to buy and hold, however, could raise some healthy arguments for sure. Both have their pros and cons. Now having participated in both, I’ll share my “real world” experience and then you can decide which is best for you.

Six months ago while searching investment properties for sale, I found and purchased a fourteen-unit multi-family building in Memphis, TN. It was a smokin’ deal, even after I paid the healthy $25,000 wholesale fee. The property was essentially uninhabitable with three of the units completely burned out. The rehab expense ($90,000) was more than the building price ($80,000) itself. Yep, $170,000 for a rehabbed fourteen-unit income property that post-rehabbed appraises for $355,000 of which gives me about $140,000 of equity (after paying out my money partner). Not to mention the replacement cost of this building is in the $600,000 range. Barring no catastrophes in the management department, it’s a pretty safe investment for all involved. I told you it was a smokin‘ deal! Here you can see the before and after pics.

BEFORE:

Investment Property in Memphis

AFTER:

Memphis Investment Property

Aside from the awesome acquisition price, the big advantages thus far of this multi-family building are the cash flow of $1,800 per month (Gross rents less 40% operating expenses and debt service) and the distribution of risk over fourteen units (If someone should move out, I have thirteen other units to pick up the slack). Although I haven’t owned this building long enough to experience any significant downside, I have noticed the sizable price difference of a major repair in a multi-family vs. a single family. For example, a sewer rupture in month four of ownership essentially wiped out two months of my cash flow. With that extra square footage and cash flow comes extra responsibility and liability.

What’s to come with buying and holding multi-family income properties remains to be seen, but that’s my summation so far. With regard to my single family “buy and holds,” I can speak with much more experience. As I’m writing this, I have equity ownership in twenty-one single family properties and sole ownership of sixteen more. I see myself adding a single family or two to my portfolio every other month or so for the next few years. My multi-family investing is done yet, by any means… but I like single family income properties, especially right now in stable and growing markets.

It’s no secret that over the last few years we’ve witnessed an implosion of our financial system of which the real estate market took center stage. In most major cities, values have plummeted from forty to sixty-percent below their highs, and well below replacement costs. That’s very exciting right now for two reasons.

First, investors can now generate cash flow in markets where it was a challenge to do so not too long ago.

Second, as the population continues to grow there will be a need for builders to resume building. Once they do, property values in their respective markets will bounce up to replacement cost values rather quickly.

Together, that means “cash flow right now” and eventual appreciation!

Now’s the time to buy single family residences, and if you can acquire multiple single families you can distribute your risk in a similar fashion as a multi-family building.

What about multi-family buildings? Won’t they appreciate, too?

Probably. But…

Ya see, multi-family buildings and single family homes are evaluated using different approaches and calculations. While a single family’s value is estimated using recent comparable sales (Sales Comparable Approach), a multi-family building’s value is estimated using the building’s income (Income Approach). Given this understanding, both types of income properties will indeed appreciate, but typically at different times and at different speeds.

Both multi-family and single family properties have their place in a real estate portfolio, but to what proportions will be up to your own personal preference. Regardless of which property type you choose to buy and hold, never forget these two tenants of real estate.

  • You make your money when you BUY real estate, and…

  • Don’t wait to buy real estate, buy real estate and wait.

There’s never been a better time in history to “buy and hold” real estate.

Comments

  1. kevin michael says:

    love your podcasts,but i never received your free course

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