Single Family Home or Multi-Family Home For Your Kansas City Real Estate Investment?

Face offI’m in an age-old conversation with a first time Kansas City area real estate investor.  This new investor has the money and is a pretty sharp cookie.  Homework has been done and now she is looking for just the right property to start her portfolio with.

I can tell she likes the idea of a single family home.  On the other hand, I generally nudge people towards a duplex for their first residential income property.  Which is right? Neither.  Both. 

Single Family Home Advantages  (and disadvantages)

  • Tenants tend to be more stable and stay longer
  • House tends to appreciate along with it’s neighborhood (which is usually at a greater pace than a multi-family home)
  • Tenants seem to take “ownership” of a single family home
  • When you re-sale, buyers can be anyone
  • Empty = no $
  • Rents tend to be higher…this is good & bad
  • Tend to have less favorable return numbers in regards to Cash Flow Before Taxes – therefore a much larger down payment required equalling lower capital growth

Multi-Family Home Advantages (and disadvantages)

  • When 1/2 is empty, you still have income from the other half
  • Maintenance and tenancy issues all under one roof
  • Return numbers generally superior to SFHs resulting in greater capital growth
  • Appreciation tends to be slightly less than SFHs (goes hand in hand with rents)
  • Buyers tend to be other investors (which means they have experience negotiating)
  • Tenants tend to be a little more transient

Are you looking to me to answer the question “Which is better?”  I’m afraid I cannot answer that.  After all, it’s your checkbook and your life.  I just lay out the possibilities and give you what I think is the best way to go at any given time based on what is currently available. 

The key is to get your real estate investment portfolio started.  Now is the best time to buy that I’ve seen in years.  That’s not a NAR line.  It’s the truth for the Kansas City real estate investor. 

6 Comments

Filed under Real Estate Investing

6 responses to “Single Family Home or Multi-Family Home For Your Kansas City Real Estate Investment?

  1. Brian

    I’ve been going through this exact process myself, trying to decide whether or not my first property should be a duplex or single family home. I confess that as a first-time RE-investor-to-be I’ve been struggling with a lot of anxiety over this and related issues. I fear I’m coming down with a case of “analysis paralysis”. On the upside, the Excel analysis tool I’ve been building is really quite awesome now. 🙂

    Do you have any approximate average numbers to help illustrate your points? Anything would be useful, such as ballpark CoC comparisons, approximate appreciation differences, vacancy rate differences (if any) etc.

    People I speak with keep telling me that these differences exist, but then don’t seem willing or able to help me get a grasp on the degree of difference.

  2. Well, I’m going to complicate your life even further. 🙂

    Because while these (and more) are differences that must be considered, it can vary wildly from neighborhood to neighborhood.

    Paralysis by analysis is very common on your first property. Let me help you simply. Take the current inventory and quickly cut it down to the “best” 10 based on your other criteria. From there visit each one, noting it’s positives and negatives.

    Then sit down and run the numbers for each one. Base the numbers on “actuals” not “possibles.” Then compare that top 10 to your observation top 10.

    Then pick a top three. Do the same. Make an offer on the best. If you don’t get what you want. Make an offer on the second.

    Listen, there will ALWAYS be a better deal out there. If not today, then tomorrow. But looking for that perfect deal keeps you from making money on the one in front of you…so long as it meets your criteria. Right?

  3. Brian

    Thanks Chris,

    What about timing? Do you think that housing values will drop over the next couple of years like people are saying? That doesn’t bother me nearly as much as the possibility that deflated property values will decrease average rent rates.

    Do you think my analysis of the best deals I can find should take into account the possibility of decreasing rent rates?

    It’s crazy. As an inexperienced real estate investor there are a ton of new concepts I’ve had to learn such as CoC, depreciation, and the time value of money just to name a few. My struggle to feel confident in my ability to analyze deals while at the same time trying to make sense out of what is going on in our economy has really got me (and I imagine other first time investors) frazzled.

    My instinct tells me that this downside of the “real estate bubble” is the time to buy. However, I don’t have a sense of where in the cycle we are. I understand that no investor, even a very experienced one, can predict the future and time the market 100%.

    Yesterday’s news about Bear Stearns seems surreal to me. It seems that Wall Street is imploding and I haven’t the understanding to know how it will affect markets here in the Kansas City metro area. I keep wondering if I should wait on my first purchase 4-6 months or so, and yet feel that I’m not really qualified to answer my own question.

    However, I am still pushing forward. I’ll be meeting with my mortgage broker this afternoon to drop off my financial documents so he can be ready to write the loan with a phone call.

    B.

  4. First, regardless of where you are you are welcome to call me to discuss these issues in depth. 913.568.1579

    Timing the market? I don’t know that you should even try. I sincerely believe that now is as good a time as we’ve had. Could the KC market continue to struggle? In fact, I think it will for another 12+ months. When will it get on the solid growth side again? I really can’t say. But I’d say we are at least a year away.

    Of course, we are not really losing ground. At least not in the areas I recommend to my clients. But what city are you in? Could be completely different. (Sounds like you are in KC. So if so, don’t concern yourself too much about that.)

    Rents constantly fluxuate. You need to be sure of the numbers you use for your analysis and then, if you really feel they’ll decrease, adjust your numbers. My observation is we are in an average to good rental market in the neighborhoods I steer people towards.

  5. Brian

    Thanks Chris. I really enjoy your blog.

    In fact, we met at your Communiversity class a couple weeks or so ago.

    Can you help me understand why I am finding what seems to be fairly motivated sellers who are landlords in the JoCo area? It almost seems like they owe more on the property than their rents will support. At least one of them was facing a short sell scenario, and yet couldn’t (or wouldn’t) seem interested in selling their property (in this case a duplex) at a price that would cashflow over expenses.

    Am I just encountering people who recently refinanced and pulled out a bunch of equity thinking that strong appreciation would continue?

    B.

  6. You actually answered your own question. 🙂

    “It almost seems like they owe more on the property than their rents will support. ”

    They didn’t buy on fundamentals. They bought on speculation. Now this is an educated guess since I don’t know the particulars. But in 99% of the cases I see, I see that.

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