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The notion that investing in multifamily is always better than investing in single-family is false. The goal of real estate investing isn’t to own a particular type of property but to secure a reliable income. The reliability of this income doesn’t depend on the property type but on the tenant who occupies the property.
To show you what I mean, I will compare the financial performance of a typical fourplex in Las Vegas to the kinds of properties we’ve targeted over 16 years.
Typical Las Vegas Fourplex Characteristics
Note: The property cost and rent came from averaging the 36 fourplexes for sale today (Jan. 31, 2024). The typical in-between tenant renovation cost came from property managers who specialize in multifamily properties.
Almost all fourplexes in Las Vegas were built before 1986 and are located in distressed areas. The typical tenant stays less than one year, and the time to renovate and re-rent is three months. The typical cost for the in-between tenant renovation is $2,000.
The typical unit rent is $800 to $900 a month. The typical cost to buy a fourplex in reasonable condition is $650,000 to $700,000.
Assuming a one-year tenant stay, the unit is vacant three months out of every 15 months. Assuming a higher-end $900/month rent:
- Gross 10-year rent: $900 x 4 units x 12 months x 10 years = $432,000
- Lost rent due to vacancy: Gross 10-year rent x (3 months vacant / 15 months) ? $86,400
- Number of tenant turnovers per unit over 10 years: 10 years / 15 months = 8 turnovers
- The number of tenant turnovers over 10 years for the fourplex: 8 turnovers x 4 units ? 32 turnovers
- Renovation cost for 32 turnovers: $2,000/turnover x 32 turnovers = $64,000
- I will ignore all other costs to keep the example simple.
- Net 10-year rent: $432,000 – $86,400 – $64,000 = $281,600
Our Single-Family Target Property Characteristics
Out of our over 490 properties, the average tenant stays for more than five years. The typical in-between tenant renovation cost is $500. The time to renovate and re-rent is one month.
For the property segment we target, $700,000 can get you two properties. The typical rent for such a property is $1,800-$1,900/month.
Assuming an average $1,850/month rent:
- Gross 10-year rent: $1,850 x 2 units x 12 months x 10 years = $444,000
- Lost rent due to vacancy: Gross 10-year rent x (1 month vacant / (5 years x 12 months)) ? $7,400
- Number of tenant turnovers over 10 years for the 2 units: 2 turnovers x 2 units = 4 turnovers
- Renovation cost for 4 turnovers: ? 4 turnovers x $500/turnover = $2,000
- I will ignore all other costs to keep the example simple.
- Net 10-year rent: $444,000 – $7,400 – $2,000 = $434,600
This means the net rent from the Las Vegas fourplex over a 10-year period is significantly lower than that from two single-family homes. This is due to shorter tenant stays, longer vacancies, and higher turnover/repair costs.
Other Considerations
Here are some other factors to keep in mind.
Low income reliability
The tenant segment that occupies fourplexes in Las Vegas is near-minimum-wage workers. They are typically the first to be laid off and the last to be rehired during economic downturns.
During the 2008 financial crash, many multifamily properties were vacant and boarded up. Many were foreclosed upon. However, our clients had zero decrease in rent and zero vacancies during the same period. The difference was due to the different tenant segments the properties attracted.
Limited rent growth
Because near-minimum-wage workers occupy multifamily properties in Las Vegas, the rent is tied to the minimum wage, which is currently $12/hour. So, you cannot increase the rent significantly unless the minimum wage increases.
If you were to upgrade the units in an attempt to increase rents, it would not be effective. Individuals who can afford higher rents typically do not choose to live in distressed areas.
Inability to screen out bad tenants
The people who occupy multifamily homes in Las Vegas typically live cash-based lives. This means there is little financial history upon which to evaluate them for payment performance.
According to one property manager, any financial history they have is likely to be bad. The screening process for cash-based tenants: “If they have two pay stubs and enough cash to pay one month’s rent, they are in.”
Leases mean little to cash-based tenants
Minimum-wage workers tend to have few possessions, so if there is an issue, they put their possessions on the back of a pickup and go down the street to the next property.
So, Multifamily or Single-Family?
Should you buy multifamily over single-family? It depends on the tenant segment it attracts. The property type does not matter.
My first investment property was a multifamily in Houston. On paper, it was a cash cow. In reality, due to nonperforming tenants, evictions, damage, and other costs, I lost money every year. My cash cow was actually a money pit.
I next bought two fourplexes in a suburb of Atlanta. They performed well, and there were few issues.
The difference was the tenant segments the properties attracted. The Houston property was a C (D?) class with near-minimum-wage cash-based tenants. The Atlanta properties were B+ class, and the tenant segment was credit-based and earned significantly more than minimum wage.
Final Thoughts
The type of property is irrelevant. Choose one that attracts a tenant segment with a high concentration of reliable tenants. In Las Vegas, the properties that attract the tenant segment with the highest concentration of reliable people are single-family homes with specific characteristics.
Buy the type of property that helps you reach your financial goals. Don’t follow others’ opinions.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
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