Is investing in Multifamily properties superior than Single family?

[fhabib]

Hi everyone,









In last year's multifamily event I asked few REIN members a question regarding the ROI of Multifamilies vs single family properties and some of the answers came back that there are economies of scale for multifamilies but the ROI of Multi families are not necessarily higher than the single families.. "it is just more stable"









My question is to members who had both types or have experience owning Multifamilies, Do you believe the ROI is higher in Multifamilies?









If not, i am not clear why many people see the multifamily investing as more superior / more for advanced or veteran investors than single family investing...









Your comments and feedback are appreciated..









thx




Fadi

 

[housingrental]

Multifamily

 

[tonyla]

I think what they were communicating is the fact that residential real estate investing (sfh, condos, townhouses) relies much more on capital appreciation then multi-families. Multi-family properties are valued much more closely to the income they generate (cap rate). While residential real estate is valued mostly on supply/demand (what someone is willing to pay for regardless of the income it can generate). That is why you see so many "investors" purchasing condos that are cashflow negative in hopes to flip it to end user at a profit.



I do think multi-families are superior in the sense they are more stable and predictable. And that is one of the most important things when building wealth. If you lose 50% of your investment capital on a deal and then make 50% on the next deal, you didn't break even...



That's why Warren Buffet's first rule is "don't lose money".

 

[Thomas Beyer]

I started with 3 rental-pooled condos, and to this day own a few single houses and condos. The MAIN difference is return on time. In any investment you invest two things: time and money. I call time "blue $s" and money "green $s". You want a decent return on both. It takes similar amount of time to research an area, a neighborhood, and then the property, plus get the mortgage, plus manage it on an ongoing basis, whether it is a single or multi-family asset. Of course you need more money for a larger asset than a smaller one. Thus the return on your blue $s is far superior in a multi- family asset. The return on green $s are indeed somewhat similar, but is also more reliant on equity upside in a single family property than a multi.



A second major advantage is that in a multi-family asset the asset qualifies for the mortgage, not you personally, and as such it is repeatable and scalable to hundreds of millions or even billion $s, something that is not possible with single properties, both from a mortgage but also a property management point of view.



The (minor) drawback is that you need more cash and that it is not as liquid, i.e. it takes longer to sell.

 

[MaximeValmont]

It depends of how much cash you have.



That cash gives you the opportunity to buy a better return on your time. This is the difference between someone that is rich and someone that is extremely rich. Return on time, Leverage, call it how you want.



I see no reason why someone would own a house as an investment except because it's cheaper than multi-family. Multi-Family is where the fun really is. So much more opportunity there.



In Multy-Family the bank looks at the deal way more than at you. If you go to a bank to buy a house, you'll have to deal with some random banker that know nothing about this business. He'll look at your salary, who you are etc. Way much resistance with buying houses.



If you go to a good bank with a really good Multi-Family deal, they'll look at the deal. Is it a good deal? yes? They'll give you money way more easily.



In my opinion the best way to make money in Real Estate is by becoming so good at it that you can find and structure deals in which the bank have no choice but to say yes. Way less resistance.

 

[fhabib]

Hi Tonyla



I wasn't thinking of the folks who speculate and buy condos with negative CF.



What i am attempting to understand is why many investors believe long term buy and hold Multifamilies are superior than long term buy and hold a typical single family... why is that if the ROI is the same...



thx

Fadi

 

[fhabib]

Thomas



Beautiful reply



so to rephrase what i got, multifamily ROI (Green $) might be the same as single family ROI, however these are the real advantages:

1. Return on time (Blue $).. "the return on your blue $s is far superior in a multi- family"

2. Mortgage qualification is based on the property not the investor

3. Due to point 2, it is more scalable and repeatable process, "something that is not possible with single properties"



Makes sense,



thx Thomas

Fadi

 

[tonyla]

I was using that example to illustrate that single family investing relies heavily on capital appreciation, versus multi-family which is valued based on it's cashflow.



I might have not been as clear as I could have been. Basically it boils down to multi-family being more stable and predictable so thus even though ROI might be the same, one is superior than the other. ROI is just one measure of how "good" a deal is.

 

[housingrental]

Hi Fadi



I think you are saying you understand the time component but not return advantage of multi-family



If not clear on this point from the above posts to write another way:



To prefer SFH's in most area's you have to be betting on the appreciation being so much higher than the appreciation at the same time of an apartment building that it makes up for the often materially reduced operating income per dollar invested (and time invested) that SFH's offer. In practice I've not seen this in my area - I'm not saying it's not possible though. I choose multi-family.

 

[invst4profit]

From my personal experience Single family homes rarely cash flow (expenses usually result in negative cash flow). ROI may compare with a multi family but single family properties are heavily reliant on appreciation to do so. ROE is even worse than ROI in a single family.



The monthly rent to purchase price ratio on a single family home is no where near what you could get from a multi family for the same purchase price. In addition expenses on both for such things as roof, furnace, exterior maintenance, snow plowing, grass cutting etc are almost the same for both making single families even more unattractive for investing.

One bad tenant or extended vacancy in a single family eats up any possible gain for years into the future.

 

[Rickson9]

What kind of cash on cash returns do you guys look for on a multi fam? Say a dozen units? Thanks!

 

[Thomas Beyer]

[quote user=fhabib]Thomas



Beautiful reply



so to rephrase what i got, multifamily ROI (Green $) might be the same as single family ROI, however these are the real advantages:

1. Return on time (Blue $).. "the return on your blue $s is far superior in a multi- family"

2. Mortgage qualification is based on the property not the investor

3. Due to point 2, it is more scalable and repeatable process, "something that is not possible with single properties"



Makes sense,



thx Thomas
indeed !

 

[Thomas Beyer]

[quote user=Rickson9]What kind of cash on cash returns do you guys look for on a multi fam? Say a dozen units?
Anywhere from -20% to +40% depending on goal, leverage, asset quality, vacancies, skills, ..



How much is an average car ?

 

[Rickson9]

[quote user=ThomasBeyer]Anywhere from -20% to +40% depending on goal, leverage, asset quality, vacancies, skills, ..



How much is an average car ?




What kind of cash on cash returns do YOU guys look for on a multi fam? Say a dozen units?



Not sure how 'average' fits there.

 

[Thomas Beyer]

[quote user=Rickson9]

What kind of cash on cash returns do YOU guys look for on a multi fam?
It's the wrong question.



I never look at cash on cash return, or not solely. There are THREE elements in properties that make it appealing, or four actually:

a) cash-flow

b) mortgage paydown

c) value upside (through time, improvements, inflation, repositioning, condo conversion)

d) tax deferral



I ask: can I reliably make 12-15% per year (or more) over a 5-7 year period with the initial cash plus cash required (in addition to cash-flow from ops) for upgrades, given all the facts surrounding this building, its location, financing, rental upside, value upside .. i.e. we do an IRR analysis as not all cash is invested on day one. Some cash comes on day 1000, 3 years in.



In an older asset you will not make ANY money in year one and 2 as you will spend to fix vacant units, repair balconies, roof, boiler, hallway carpets, evict tenants, change curb appeal etc. Then you may re-finance and hold 5 more years .. or not ..



Here is an example:



We bought a building in Calgary in Dec 2010 for $14.6M with roughly $5M cash, owned by two of our LPs (Kings Castle and PRISM A).
Cash flow on that building last year was $30,000 after all vacancies, costs, repairs, mortgage payments. You could argue: what
a crappy deal. Not even 1% cash on cash return.



But we paid our mortgage down by about $220,000 .. so add that to the cash-flow and we made 5% on the cash allocated .. assuming flat value. Not bad. better than the stock market or a bond.



Then in January of this year we got the building re-appraised for our
IFRS audits, and presto: $16.6M was the appraised value. So add this $2M
to the 5% return in 15 months and it is now about a 45% return on the cash invested.



This is how you make money in multi-family real estate: you add value and hold for a while, forever possibly.



Cash-on-cash return is not they key issue. Like the color of your car. Not the key issue, although important for some.

 

[Rickson9]

That was the answer my question sought to inspire. Thanks! Any other contributors?



PS: I love those 'presto mark-to-market' returns.

 

[housingrental]

I trust anything under 20% will be low compared to your Phoenix investments?



[quote user=Rickson9]That was the answer my question sought to inspire. Thanks! Any other contributors?

 

[Rickson9]

[quote user=housingrental]I trust anything under 20% will be low compared to your Phoenix investments?





Unfortunately I never saw a 20% cash on cash return in Phoenix, AZ.



What kind of cash on cash return do you look for?

 

[housingrental]

I don't put much weight to this metric, too much variance based on financing options which could change materially



True IRR (factoring in pro-ration of roof, driveway, etc.. all capital items) with no leverage over time (ie after stabilization, for years X-20+) minimum 6.5% is the goal... really tough to find in Ontario in 2012



I trust your thoughts might vary



And yourself Mr. Rickson9 ?



[quote user=Rickson9][quote user=housingrental]I trust anything under 20% will be low compared to your Phoenix investments?





Unfortunately I never saw a 20% cash on cash return in Phoenix, AZ.



What kind of cash on cash return do you look for?

 

[bizaro86]

[quote user=Rickson9]That was the answer my question sought to inspire. Thanks! Any other contributors?



PS: I love those 'presto mark-to-market' returns.


That's kind of a tough one though. Your website has your stock returns listed on a mark to market basis. Granted, that's more relevant for assets with a highly deep and liquid market than real estate, but appreciation is a potentially important part of the return from investing in real estate. Since properties are much less fungible and less liquid that shares of stock, an estimate is really the only way to go. There are definitely some downsides there (how do I know I can trust the estimate if I'm relying on it) but it can't be helped, imo.



Regards,



Michael