Why are single family rentals better than multi?
 

I've read many times that single family homes are better rental investments than multifamily homes. But I've never understood why. I would think that maintenance costs on three single family homes would be much greater than for a three unit townhouse complex and bring in approx the same rents. So why do people believe that single family homes are better for rental?

appreciation and liquidity. I don't think they are necessarily better than multi-family units.

What turbo said. SFRs easier to manage; usually one stable family. I don't think SFRs cash flow as well, which is huge. Financing on multis gets worse at 5 or more units.

I have was told that duplexs are good bet. This advice was geared towards maximizing cash flow, not long term appreciation.

Also in many states, once you get above 4 or so units (varys) you run into a whole new set of things that are required such as sprinkler systems, common lobby areas. etc.

From what I've seen, trailer parks and multi-family will cash flow out the ying-yang. It makes me so jealous.

It's not the house, but it's the land that's worth the money.

The house on it is just an easy way to get someone else to pay the mortgage for you. On a multi', someone else has already done the developing and made the profit.

As posted earlier, appreciation and liquidity are key but there are other reasons. The multifamily will probably have higher cash flow due to shared walls, facilities, etc, but more work, generally a lower class of tennant, more turnover, etc.

Compare a 4-plex to owning four houses for a small investor. First of all, there is no diversification in the 4-plex. If the area where the 4-plex is loses/fails to gain value, 100% of your investment does the same. If you have 4 houses in different areas, each is only 25% of your investment. You can have each home in a different neighborhood or even a different state or country.
Secondly, if your circumstances change or you see a better opportunity, you can sell one house and buy another rather easily while you cannot sell one unit of your 4-plex. Additionally, while you sell the one home, you continue to get appreciation and cash flow from the remaining three houses. With the 4-plex, it is all or nothing

Often multifamily properties are not as liquid. Almost everyone needs a house, but there are a limited number of folks looking for a 4-plex.

Local law/rules are often the same for a single family rental as for any other home in the neighborhood. Multifamily units often have very restrictive rules.

It is usually easier to get into rental property ownership through single family homes because most folks already own one. All you have to do is rent it when you move out or move up. There is no new loan, qualifying, inspections, etc. You already know the product and a realator does not get a cut from selling the old home and another for buying the rental. You can also buy one at a time instead of all at once for a multifamily.

Finally, if it ever becomes necessary, you can convert a rental home to your personal residence and live there briefly...or permanently. There are significant tax advantages to doing this also.

I wouldn't imagine the down payment for a 4-plex would cover 4 houses. Even though you'd have lower turnover on house, managing 4 houses would have to be a lot of work vs one 4-plex. Going out of your local area is a PITA. Why would one want to sell one unit of a 4-plex?

Converting one's personal residence to an income property means walking away from your capital gain exclusion. Realtor's commissions are paid by sellers.

A 4-plex can be 1031 exchanged for a house that could be converted to personal use within 1-3 years, depending on how aggressive you want to be with the IRS.

The amount of work is really more related to the number of tenants and the turnover. They would both have the same number of tenants and the 4-plex would most likely have higher turnover.
IMHO folks that live in single family homes take much better care of the home and require less repairs. Most single family homes do not have shared grounds or pools that require care like many multifamily units. Most single family rental homes require the tenant to maintain the lawn, etc.

You would not want to, or be able to, but you certainly could sell one of four houses if you wanted to raise funds or limit exposure in a certain area. Or you could sell of one home with significant equity to pay off the other mortgages to increase cash flow on retirement, etc.

To an extent, but not really. It only appears that way. The commission is built into the sales price. The buyer certainly shares in the cost, if not totally assumes it. It is just invisible to him.

One would have to be pretty brave to try to pull that one on the IRS.

That is true if you have a significant gain. However a small gain would be eaten up in the costs of buying a different rental, not to mention the opportunity costs of having to make a higher down payment (usually 30 percent for rentals) and the higher interest rate when purchasing a rental property. An low down payment FHA or VA loan can that was originally for a primary residence can be kept when converting to a rental.

I think the work factor includes more than the number of tenants and turnover. 4 houses = 4 roofs, 4 yards, 4 yards, 4 sets of appliances and plumbing, etc.

If a realtor's cut is built into the sales price, and the sales price is market-driven, then it is invisible as far as I'm concerned. If one wanted to save on some of it, they could find an apppropriately priced FSBO. Lender's lend on appraised values, which are based on sales prices.

Many people are converting investment properties into personal residences. You mentioned it yourself! Some do it in as little as 6 months, which is risky IMHO. After 3 years it's bulletproof, as the statute of limitiations runs out on your tax return including the exchange.

Most residences do include a significant gain. Those with a small gain, sure. My whole point is poor cash flow sucks for investment property. A negative cash flow impacts one's ability to qualify for other loans; several of them will make qualifying impossible, even with stated income. There's no limit to how many properties one can own without negative cash flow. Income properties can easily be financed with 10% down. 20% is better, and 25% yields the best rates. An FHA or VA loan with a small down won't buy much of a house these days in many parts of the country.

There is great value in incrementalism. It would take incredibly bad timing or bad judgement for one to have to replace the roof in all 4 houses at the same time, while the roof area of the multi would all probably need replacement at the same time.
I would also imagine that both the 4-plex and the 4 homes would have exactly the same number of appliances and a similar amount of plumbing. The key, of course...is to only put a rental into service if everything was shipshape...including the roof.

Although invisible to the buyer, they probably pay for at least 50% of it or more of the commission in the sales price. Not an insignificant amount. IMHO most people who sell their homes via FSBO do so in order tyo keep most of what they would have paid fopr commissions for themselves...so once again, the buy pays...unless they are able to find a desperate seller.

I know that is common with single family to single family. I don't know about multifamily to single family since the exchage must be "in-kind." My understanding is that the IRS is looking very hard at these exchanges now and intend to get more agressive in disallowing some conversions.

Lots of folks (long term investors who do not primarily do real estate for a living) do not have the high gains you see in CA or want or need excessive cash flow right now due to taxes, etc. If a person gets into a starter home in many parts of the US for $100k to $200k for 0 to 5% down (great leverage), then a couple years later, most are lucky to have enough appreciation to achieve the 20% equity required to keep from paying PMI. That is a relatively small amount of tax exemption to pass up, but still gets the payment to the level where they should be able to rent the home out without incurring a negative cash flow...while still getting a tax break because it would be a negative flow (loss) on paper due to the depreciation write-off. Effectively over time, instead of cash flow, one gets equity growth which can be removed when desired based on tax circumstances etc. If one is not trying to flip the homes and get rich fast, they can just let their renters pay off the houses for them and get rich slow. My rentals are relatively risk-free since I have a lot of equity tied up in them now (so I cannot spend it) and are timed for payoff the year I plan to retire and will have signoificant positive cash flow then. I can always refinance to pull out cash is I really need it, but that is difficult enough that I would not do it on a whim.

like-kind is pretty easy to meet. They don't have to be the same type of income property.

as steve and fint have shown, there is no superior rental property. It depends on your market and the investor's needs and goals.

fintstone- I'm having a hard time believing 4 houses are comparable to one 4-plex. What sort of value are you placing on each?

You're right about the same number of appliances, that wasn't thought out. My point is there's more things to deal with on 4 properties.

Seems to me the concept of realtor's commissions is irrelevant to this discussion. If it bothers you, buy or sell FSBO. Buying below market is always good.

Like-kind means property held for investment. A 4-plex can be exchanged for a SFR. I could see the IRS coming down on conversions; my gut feeling is it's a tax-dodge and shouldn't be allowed. My understanding is 3 years go by before you convert, and you're golden. No big deal in a long-term plan.

I would think insignificant appreciation would be the exception rather than the norm. I can't believe many in this country are buying houses for $100-200K. 10% appreciation per year compounded leaves a lot of gain that would be nice not to pay tax on, in my book.

I'm not familiar with income properties outside of California, but avoiding a negative cash flow is difficult without a very large down payment. It's much easier here to reach a break-even with multis here, and deals that pencil out well are hard to find. If one finds himself looking at taxable cash flow, then it's time to buy another income property. As you said a positive cash flow can be wiped out with depreciation. What's wrong with enjoying that now vs waiting for retirement? And multis can be paid off and worth more at retirement, too.

I can easily buy 4 nice 2500 sq ft, 2 car garage houses, each on 1/4 to 1/3 acre lots for a total of 800k. There are several ways I can do this without much risk. I could buy all at once with 20-30% down, but if I buy one per year and am willing to live there for a year or so, I can get into each with an FHA loan (or other) and 5% down. I can rent each home after I move out for about $1500 per month which gives me a neutral or slightly positive cash flow and around $10k of my own money iinvested. I can use the depreciation to wipe out (for tax purposes) the positive cash flow of the homes I have owned for long enough to pay off or where the rents have increased. I would not particularly enjoy additional cash flow now as I already make a lot of money on my regular job and it would all go to taxes.

$200K houses like that renting for $1,500/month is excellent. Are those in Nevada? What sort of 4-plex would you get for $800K and what would they rent for?

No. The rents in Nevada will only cover about 50% of the carrying costs due to the recent CA influence (they would a couple years ago). I am specifically talking about the GA suburbs north of Atlanta, but similar are also available in NC.
I have one home in GA that I paid 149k for that rents for $1600. I bought it VA with 0 down. The same renters have lived there now for 7 years. It is now worth between $200k and $220k. It has a 15 year mortgage. I have a small home in NC that cost me $40k (FSBO, owner carried with 10k down), but it came with 2 other building lots. I just spent $25k on rennovation and I expect it to rent for about $850 in Dec.
I could easily build on the other lots or sell them, but I am thinking about using it for a vacation home in the future and like the space since it is heavily wooded, but in city limits.

Duplexes and 4-plex are not common and do not command very much rent in the area that I am referring to because there is so much cheap space/housing that there is little reason to share a lawn, etc.

just out of curosity, fintstone, how do you deal with the problems associated with rental properties from several states away? Late paying tenants, repair costs, etc. Do you manage the properties yourself?

Check the other RE thread where this is discussed.