Okay let’s talk about single family, versus multi-family. I abbreviated these here for the sake of space on my white board. One of my favorite topics. Single family investing, versus multi-family investing. I’ve done well over 100 single family investment projects over the years, and I’ve done a number of multi-family investing projects, and continue to do both. I have some thoughts here I want to share.
First on the financing, then I want to talk about management, and then I want to talk about the scale. First on financing. On single family rentals the financing, you typically have a couple of different options. You can use hard money on the front end, or short term loans, or private money. These are usually higher interest, short term loans. They might have a six month, or twelve month maturity that you can borrow the money, fix up a house, and then refinance out, or sell. And what it will do is allow you to go out and buy distressed property without actually needing to have $100,000, or $200,000 cash to go do it.
You can finance those on the front end, a single family project that’s let’s say a renovation where you need to go in and put in $20,000, or $30,000 in renovation. You can use private money, or a hard money loan to go out and do that, and that’s a great strategy and I’ve done that dozens, and dozens of times. Long term financing for single family is either usually going to be a 30 year fixed rate Fannie Mae debt, or some kind of a commercial loan with maybe a 30 year amortization and a five year balloon note or something like that. Those are typically the two that I do on single family.
Now, one of the big gotchas on the single family, is that this is typically recourse financing. Meaning that the owner is personally liable for any shortcomings in paying back the loan. It’s not as much asset based. Now let’s flip over to multi-family investing and talk about how the financing works. Now they’re plenty of creative ways to finance multi-family as well. Owner financing, short-term bridge loans, but our favorite is to be able to get into non-recourse fixed government backed Fannie Mae, or Freddie Mac debt day one.
If the properties 90% full for the last 90 days, you have really good odds of being able to get this fixed rate, 30 year amortization, low interest rate, non-recourse debt often with two, three, four, or five years of interest only payments, which is going to increase your cash flow and reduce your monthly expenditures. Extremely attractive financing on some of these multi-family projects.
Now, if the property has low occupancy, or has massive deferred maintenance you may need to get into a bridge loan, a shorter term product, but you’re still typically looking at some interest only in that loan. Some of the differences between financing the two, and there are some great advantages to financing multi-family. I want to talk about management. Okay, let’s say you’ve got … And let’s talk about just rental properties. Flipping houses doesn’t really require any property management, just construction management, which is another topic altogether.
But let’s talk about property management on single families. You can either do it yourself, or you can hire a third party property management company. Now I’ve never had more than 25 single family rentals, so I always did those myself. Develop some systems, hired somebody to lease them out, and that was manageable to do with some software and things on my own. But you could hire a third party management company if you don’t want to worry about anything. They’re typically going to charge 8% to 10% of revenue. And when you start to look at the cash flow on a single family rental property, 8% to 10% depending on your outlook can be a meaningful chunk of that profit.
That’s why I never opted to outsource my single family property management. However, when you get over to the multi-family side, and you get into this 100 plus unit space, you’re typically looking at a 3% to 5% management fee, and the management company is doing a whole lot of things for that fee. They’re doing your accounting, they’re doing your HR, hiring and firing, staffing, marketing, leasing. Tremendous amount of value being added by the property management company, and it’s one of the reasons that I think your property management company in multi-family is one of your most important partners. Along with your investors, and the bank, but terms of operations the most important partner.
You’ve definitely got some of management economies of scale, that win out on the multi-family side. Especially when we’re talking about 100 plus unit properties where you can really get some economies of scale, and have a good payroll number for … Or a good line item for your payroll.
Okay, third thing I want to talk about in single family, versus multi-family here is this scale. Let’s say you want to replace a $10,000 a month income, and you can go out and do a rental house that’s going to net you everything. Net everything, it’s going to net you $300.00 a month. Well if you got $300.00 a month for a house, and you want to replace a $10,000 a month income you do the math on how many houses that is. It’s a decent amount of houses, right?
I’m going to guess that at that many houses most people are going to want a third party management company managing those houses, and that will of course eat into the profits, but may be a great trade-off depending on your outlook. But you’re going to have 30 different tax bills to pay. Let’s just say it’s 30 houses, 33 houses whatever. You’re going to have 30 different utility bills … Or 30 different insurance policies, you’re going to have a million dots on the map all over the city, or whatever market you own those properties in. It gets a little squirrly on tax returns on managing paying the property taxes, it’s just a lot of minutia to keep up with for a relatively small amount of cash flow.
Now, the scale on multi-family is obvious, you go out and buy 100 unit apartment building. You’ve got one address, you’ve got one tax return to do, and you’ve got a lot of economies of scale in doing that, and so it’s a lot easier to get to whatever income number you need to replace off the multi-family side, than it is on the single family side.
There’s plenty more to this debate of single family, versus multi-family, but I wanted to talk about those three things to kind of highlight some of my experiences in each arena.
Take care.
