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22: Single Family Houses or Multifamily?

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Many listeners that I speak with are already doing a good job with cash flow investing. Most frequently, I talk to people who are investing in single family homes.

I am certainly NOT against investing in this kind of asset. However, I always have the same advice for people who are deciding whether or not to go down that road.

Either plan on buying 10 single family homes or NONE.

Here’s why:

First, say you have a single family home and you are cash flowing $200/month. Over 5 years, you might have raked in 10-12K in cash flow.

Then one day, you have a major capital expenditure–like a new roof. What just happened to most of your cash flow? It got used to buy a new roof!

Then there is the issue of vacancy. In a single family home, you only have two options, 0 percent vacancy or 100 percent. When you are at zero, you are LOSING MONEY.

Now, with the issue of capital expenditures and vacancy, you can mitigate those realities by owning several homes.

If you have 10 homes, at any time you might have one vacancy and when capital expenditures occur, your cash flow isn’t all demolished with one roof.

Of course there are some issues that buying several houses does not help. In fact, buying 10 different houses could mean that you are interfacing with several different property managers.

And now…you have 10 furnaces instead of one!

Now don’t get me wrong, people have made fortunes buying single family homes. Dean Graziosi, one of our recent guests, owns several thousand homes!

But my preference is multifamily. The economies of scale soften the blow of capital expenditures, there IS such thing as 90 percent occupancy, and you have one property manager for multiple units.

Apartment buildings in general are also advantageous because of they way they are valued. The value of a single family home is simply the opinion of the buyer. It’s very subjective. As a guy trying to sell my own house right now, this fact is painfully evident.

For apartment buildings, it’s all math. You have a formula (see cap rate explanations in earlier threads). Therefore, you just increase rents and that will typically increase the value of your property.

Now, I do understand that not everyone can afford to buy a small apartment building or participate in our investor club (https://www.wealthformula.com/join-2/invest-with-me/) and buy into fractional ownership of larger assets in a syndication model.

However, there is often not a huge difference in price between single family homes and duplexes or even up to 4 units. This should be something you consider next time you consider adding property to your portfolio.

Buck